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Author: 


Seligman,  Edwin  Robert 
Anderson 

Title: 

Essays  in  taxation 


Place: 


[New  York] 

Date: 

1921 


MASTER   NEGATIVE   # 


COLUMBIA  UNIVERSITY  LIBRARIES 
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Seligman,  Edwin  Robert  Anderson,  1861- 

Essays  in  taxation,  by  Edwin  R.  A.  Seligman  ...  9tli 
ed.,  completely  rev.  and  enl.  [New  York]  The  Macraillan 
company,  1921. 

xi,  806  p.    22i'". 

"American  bibliography  of  the  General  property  tax" :  p.  63-65. 


1.  Taxation. 

Library  of  Congress 
Copy  2. 


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THE  LIBRARIES 


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LIBRARY 


ESSAYS  IN  TAXATION 


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THE  MACMILLAN  COMPANY 

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DALLAS  •   SAN  FRANCISCO 

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MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltdw 

TORONTO 


ESSAYS    IN    TAXATION 


BY 


EDWIN   R.   A.   SELIGMAN 

MCVICKAR  PROFESSOR  OP  POLITICAL  ECONOMY 
IN  COLUMBIA  UNIVERSITY 


NINTH  EDITION 


COMPLETELY  REVISED  AND  ENLARGED 


THE  MACMILLAN   COMPANY 

1921 


All  rights  reserved 


A  3- 


./  ' 


COPTRIQHT    1895 

Bt  macmillan  and  CO. 


New  Revised  and  Enlarged  Edition 

Copyright,  1913 

Br  THE  MACMILLAN  COMPANY 

Set  up  and  electrotyped.    Publishetl  March.  1913. 

Reprinted  October.  1915;  April,  1917;  April,  1919. 


New  Revised  and  Enlarged  Edition 

COPYRIQHT,  1921 

By  THE  MACMILLAN  COMPANY 
Published  December,  1921 


Russian  Translation,  1909 
French  Translation,  1914 


3 


no 


Printed  in  the  United  States  of  America 


PREFACE  TO  THE  NINTH  EDITION 

The  well-nigh  nine  years  that  have  elapsed  since  the  la^t 
complete  rewriting  of  this  book  have  witnessed  not  only  the 
Great  War  but  important  changes  in  state  and  local  taxation 
here  and  abroad.  Advantage  has  therefore  been  taken  of  this 
edition  not  only  to  bring  the  various  chapters  down  to  date  but 
to  add  five  new  chapters,  three  of  which  are  directly  the  out- 
come of  the  war  discussion.  In  order  to  make  room  for  these, 
the  three  chapters  devoted  to  American  Reports  on  Taxation 
have  been  compressed  into  one,  although  contmued  down  to 
date.  In  the  body  of  the  book  an  attempt  has  been  made  to 
take  account  not  only  of  the  changes  in  legislation,  but  also  of 
the  recent  discussions  in  fiscal  science. 

Edwin  R.  A.  Seligman. 

Columbia  University, 
August,  1921. 

FROM  THE  PREFACE  TO  THE  EIGHTH 

EDITION 

This  book  was  originally  published  in  1895,  and  the  favor 
with  which  it  was  received  has  rendered  necessary  a  new  edition 
every  two  or  three  years.  Owing  partly  to  the  pressure  of  other 
occupations  and  partly  to  a  shrinking  from  the  arduous  labor 
which  would  have  been  required  to  keep  the  presentation  up  to 
date,  these  successive  editions  contained  but  slight  changes. 
Now  however,  after  the  lapse  of  almost  eighteen  years,  the 
progress  of  the  world,  both  in  fiscal  facts  and  in  economic  theory, 
has  been  so  marked  as  to  render  any  further  delay  impossible 
if  the  book  is  to  remain  a  half-way  satisfactory  mterpretation  of 

actual  conditions.  ,         ,  ^  c  ^ 

I  therefore  determined  to  subject  the  volume  to  a  careful 
revision  and,  where  necessary,  to  rewrite  entire  sections  or  even 
chapters.  IMoreover,  in  the  interval,  not  a  few  of  my  addresses 
and  articles  on  germane  topics  have  appeared;  and  it  seemed 

V 


f 


I 


w 


VI 


PREFACE 


0 


opportune  to  incorporate  a  selection  from  these  into  the  book, 
even  at  the  risk  of  some  inevitable  repetition  in  a  few  pages 
here  and  there.  As  a  consequence,  the  thirteen  chapters  of  the 
eariier  editions  have  grown  to  twenty-one;  and  this  together 
with  the  additions  to  the  remainder  of  the  work  has  resulted  in  a 
volume  of  almost  double  the  size  of  the  original.  To  a  large 
extent,  therefore,  the  present  edition  may  be  regarded  as  a  sub- 
stantially new  work. 

E.  R.  A.  S. 

Columbia  University,  New  York, 
March,  1913. 


CONTENTS 


CHAPTER  I 


PAGE 
1 
6 


The  Development  of  Taxation 

I.     Voluntary  and  Compulsory  Payments 
II. '  Direct  versus  Indirect  Taxation " 

III.  The  Forms  of  Direct  Taxation 

IV.  Changes  in  the  Basis  of  Taxation      .... 


1 


CHAPTER  II 

The  General  Property  Tax 

I.     Practical  Defects 

History  of  the  Property  Tax  in  Antiquity 

Early  Mediaeval  History  of  the  Property  Tax   •        •         ' 

Later  Mediaeval  and  Modem  History  of  the  Property  Tax 

Theory  of  the  Property  Tax 

Conclusion 


II. 

III. 

IV. 

V. 

VI. 


i 


CHAPTER  III 


The  Single  Tax 


I.    What  is  the  Single  Tax? ' 

II.     The  General  Theory 

III.     Practical  Defects 

1.  Fiscal  Defects 

2.  Political  Defects 

3.  Ethical  Defects 

4   Economic  Defects,     (a)  Effect  on  poor  communi- 
ties; {b)  On  farmers;  (c)  On  rich  communities  . 

IV.    Conclusions 


CHAPTER  IV 


Double  Taxa^on 


I.    By  the  Same  Authority 

1.  Property  and  Income 

2.  Property  and  Debts.  . 

3.  Corporations  ind  Investors 

4.  Corporate  Property  and  Stock 
II.     By  Competing  Authorities 

vu 


14 


19 

32 
38 
45 
56 
61 


66 

68 
75 
75 

77 
79 

83 
96 


100 
100 
102 
107 
109 
110 


1! 


VIU 


CONTENTS 


CHAPTER  V 


\ 


The  Inheritance  Tax 


PAGE 

126 


CHAPTER  VI 


The  Taxation  of  Corporations.     I.  History 
I.     Early  Taxation  of  Corporations 
II.     Development  of  the  Corporation  Tax 

1.  Banks 

2.  Insurance  Companies 

3.  Railroads 

4.  Other  Public-Service  Corporations 

5.  The  General  Corporation  Tax  . 

6.  The  Tax  on  Corporate  Charters 
III.     Bases  of  the  Tax       .... 


145 

148 
157 
161 
170 
182 
195 
215 
218 


CHAPTER  VII 

The  Taxation  of  Corporations.     II.  Principles 

I.  The  PYanchise  Tax 221 

n.    Economic  Theory 238 

III.    Practical  Reforms .  250 

IV.     The  Legal  Situation 264 

CHAPTER  VIII 

The    Taxation    of    Corporations.      III.  Complications    and 
Conclusions 

I.     Property  and  Debts        .        , 271 

II.  Income  and  Property 273 

III.  Property  and  Stock .  276 

IV.  Double  Taxation  due  to  Conflicts  of  Jurisdiction    .        .  280 

1.  Interstate  Taxation  of  Corporate  Property  .         .  280 

2.  Of  Corporate  Securities 282 

3.  Of  Non-resident  Security-holders  ....  285 

4.  Of  Receipts 292 

V.     The  Corporation  and  the  Security-holder        .        .        .  297 

VI.     Incidence 308 

VII.     Local  Taxation 310 

VIII.     Conclusion 314 


CHAPTER  IX 

Modern  Problems  in  Taxation 

I.    Justice  and  the  New  Economic  Basis  of  Society 
II.     Economic  Analysis  and  Fiscal  Facts 
III.     Practical  Problems 


316 
320 
325 


r 


CONTENTS 
CHAPTER  X 

A  Quarter  Century's  Progress  in  Taxation 

I.     General  Progress        .        •         '        "  rru* 
II      Social  Considerations  and  the  Benefit  Theory 

III.  Social  Considerations  and  the  Faculty  Theory 

IV.  Conflicts  between  Tax  Jurisdictions  . 

CHAPTER  XI 

Separation  of  State  and  Local  Revenues 


I 


I. 

II. 

III. 

IV. 

V. 


Present  Difficulties 

Meaning  and  Advantages  of  Separation 

Objections  to  Separation   . 

History  of  Separation 

The  Outcome 


CHAPTER  XII 


The  Relations  of  State  and  Federal  Finance 

I.  The  Principles  of  Efficiency  and  Smtability 
II.    The  Principle  of  Adequacy 

hi!    The  Apportionment  of  Federal  Revenues 

CHAPTER  Xlll 

The  Importance  of  Precision  in  Assessments 

I.  Democracy  and  Administration 

II.  American  Conditions  .... 

CHAPTER  XIV 

The  Classification  of  Public  Revenues 
I.    The  Primary  Classification 

II.  Police  Power  versus  Taxing  Power      . 

III.  Fees 

IV.  Special  Assessments           .... 
V.    Prices 

VI.    Conclusions 


page 
330 
333 
338 
342 


347 
350 
357 
368 
372 


378 

383 
386 


390 
393 


400 
402 
406 
413 
421 
430 


CHAPTER  XV 


The  Betterment  Tax 
I.     The  Origin 
II.     Betterment  and  Taxation 
III.     The  Principle   . 


433 
436 
444 


X  CONTENTS 

CHAPTER  XVI 

Recent  Reforms  in  Taxation.   I.  The  Reforms  of  1893-1895        page 

I.    England 452 

II.    New  Zealand 459 

III.  Holland 466 

IV.  Prussia •  .  473 

CHAPTER  XVII 

Recent  Reforms  in  Taxation.    II.  The  Reforms  of  1909-1910 

I.    Great  Britain 482 

II.    The  Land  Taxes 488 

III.  Gennany 496 

IV.  The  Tax  on  Unearned  Increment    .                  .         .         .  505 
V.    Australasia 516 

VI.    The  Exemption  of  Improvements 522 

VII.    The  Income  Tax  and  the  Relation  of  State  to  Federal 

Finance    .........  531 

VIII.    Conclusion 538 

CHAPTER  XVIII 

Recent  Literature  in  Taxation 

I.    Germany      .........  543 

II.    France 553 

III.  Italy,  Holland  and  Spain 561 

IV.  Switzerland 568 

V.    England .572 

VI.    United  States .580 

CHAPTER  XIX 

American  Reports  on  Taxation 

I.    The  PreUminary  Period 596 

II.     From  1870  to  1900        .         .         .         .         .         .         .598 

III.  From  1901  to  1910 609 

IV.  Municipal  Tax  Commissions  ......  621 

V.  From  1911  to  1921 628 

VI.    Conclusion 639 


t 


CONTENTS 

CHAPTER  XXII 

The  War  Revenue  Acts 

I.    Historical  Retrospect    . 
II.    Summary     . 

III.  The  Tax  Burden 

IV.  The  Income  Tax 

V.  The  Excess-Profits  Tax 
VI.    Conclusion  . 

CHAPTER  XXIII 

Loans  versus  Taxes  in  War  Finance 

I.    What  are  War  Costs     .         '    ,^  '         ' 
II     Can  War  Costs  be  Shared  with  the  Future      . 
hi!    Ought  War  Burdens  be  Shared  with  the  Future 
IV.    The  Disadvantages  of  Loans 
V.    The  Comparative  Merits  of  Taxes 

VI.  Conclusion 

CHAPTER  XXIV 
The  Cost  of  the  War  and  How  it  Was  Met 


XI 


679 
683 
686 
693 
700 
708 


717 
720 
732 
736 
741 
747 


I. 

II. 

III. 

IV. 

Index 


The  Expenditures 
The  Revenues 
The  War  Taxes 
The  Loans  . 


750 
757 

767 
772 

783 


y» 


II 


CHAPTER  XX 

The  Next  Step  in  Tax  Reform 

The  Classification  of  Property 


I. 
II. 


The  Income  Tax 


641 
650 


1 . 


CHAPTER  XXI 

The  Relation  op  Federal,  State  and  Local  Revenues 

I.    The  Problem 

II.     The  Five  Methods 

III.    The  Choice  ...... 


660 

663 
669 


i!' 


7 


t 


ESSAYS  IN  TAXATION 


CHAPTER  I 

THE  DEVELOPMENT  OF  TAXATION 

To  the  citizen  of  the  modem  state,  taxa^n,  however  dis- 
agFeeable  it  may  be,  see^^tural.    It  is  difficult  to  realize 
that  it  is  essentiaUy  a  recent  growth  and  that  it  marks  a  com- 
paratively late  stage  in  the  development  of  public  revenue, 
it  is  more  difficult  to  realize  that  each  age  has  its  owb  sys- 
tem of  public  revenue,  and  that  the  taxes  of  to^ay  are  different 
from  those  of  former  times;  it  is  still  more  difficult  to  perceive 
that  our  ideals  of  justice  in  taxation  change  with  the  alteration 
in  social  conditions.    Not  only  the  actual  forms  of  taxation, 
but  the  theories  of  taxation  as  well,  vary  with  the  economic 
basis  of  society.    Fiscal  conditions  are  always  an  outcome  of 
economic  relations.    This  is  true  even  where  the  direct  influence 
of  political  causes  is  traceable,  for  political  changes  are  in 
the  last  resort  dependent  on  economic  changes.    Fma^f «  f»j 
economics  are  inextricably  intertwined.    Like  all  the  facts  of 
social  life,  taxation  itself  is  only  an  historical  category. 

I.  Voluntary  and  Compulsory  Paynwnts 
At  the  beginnmg  of  history  there  is  no  such  thing  as  a  state. 
Whether  we  accept  Hobbes'  theory  of  the  bellum  omnium  con- 
tra <mms,  or  the  more  modem  clan  theory  of  the  origin  of  society 
there  is  no  public  household,  because  there  are  no  recognized 
public  needs.  But  even  in  the  original  man  tbeje  are  pos- 
sibilities of  social  development.  Man,  as  Anstotle  tells  us,  is  a 
social  and  political  animal.  Centuries  of  hard  experience 
strengthen  the  social  mstinct  and  contribute  to  form  primitive 
society,  until  finally  a  real  political  life  emerges. 

Gradually  from  either  physical,  ethical  or  religious  causes 
a  leader  evolves.  The  oldest  or  the  wisest  or  the  bravest— 
at  all  events,  the  one  possessed  of  some  peculiar  character- 

1 


1 


2  ESSAYS  IN  TAXATION 

istic — ^becomes  the  leader  of  the  horde,  the  clan  or  the  tribe. 
He  acts  as  the  great  priest,  great  judge  or  great  warrior,  often 
combining  all  three  qualities.  .There  are  no  financial  needs, 
because  the  only  consideration  is  that  of  defence;  and  every 
man  contributes  to  the  defence  in  .his  own  person.  The  leader 
himself  subsists  on  the  booty  of  war. 

But  with  the  growth  of  society  and  the  expansion  of  the 
clan  into  the  larger  community,  the  public  needs  develop. 
\  Administration  begins.  Roads,  bridges  and  fortifications  are 
constructed,  and  the  prince  or  king  must  now  not  only  maintain 
order,  but  must  be  assured  of  a  revenue  to  support  his  house- 
hold and  to  distribute  favors  to  his  retinue.  All  his  followers, 
being  roughly  equal,  now  support  hun  by  gifts,  whether  of  labor 
or  of  property.  In  all  primitive  societies  voluntary  offerings 
constitute  the  first  form  of  conmion  contributions,  and  every 
man  feels  the  necessity  of  upholding  the  political  and  military 
organization  by  his  own  personal  efforts. 

The  king^s  needs  now  increase.  They  are  chiefly  personal 
needs,  except  in  so  far  as  expenditures  are  made  for  the  pur- 
poses of  internal  peace  and  external  defence.  But  in  order  to 
ensure  his  position,  the  king  endeavors  to  secure  his  revenues 
elsewhere.  He  develops  the  subsidies  and  tributes  of  the  allied 
and  conquered  nations,  and  amasses  treasure  filched  from  abroad. 
Part  of  this  he  distributes  among  his  followers;  part  he  retains 
to  increase  his  own  possessions.  The  private  property  of  the 
king  differentiates  itself  from  the  public  property,  which  was 
originally  common  to  all.  The  monarch  now  increases  his 
revenues  and  domains  through  the  acquisition  of  lucrative 
prerogatives  of  all  kinds.  Certain  activities  come  to  be  looked 
upon  as  within  his  peculiar  province.  The  king's  peace  must 
be  kept — any  infraction  must  be  paid  for  in  fines  and  penalties; 
not  only  crimes,  but  torts,  have  their  public  side.  Nobody  can 
harm  an  individual  without  breaking  the  king's  peace,  and 
having  to  pay  for  it.  Commerce  begins,  and  weights  and 
measures  and  money  are  needed.  The  royal  rights  of  coinage 
arise;  and  as  the  kingship  becomes  stronger,  the  rights  of 
escheat,  of  wreck,  of  confiscation  develop,  until  finally  the 
various  royal  prerogatives  bring  in  a  substantial  revenue. 

Voluntary  payments  have  in  the  meantime  ceased.  As 
society  advances,  what  was  at  the  outset  freely  given  comes 
to  be  paid  by  the  individual  from  a  sense  of  moral  obligation. 
But  with  the  weakness  of  human  nature,  in  the  face  of  a  diver- 


I) 


I 


^1 


THE  DEVELOPMENT  OF  TAXATION  3 

sity  of  interests,  even  the  feeling  of  duty  soon  fails  to  produce 
an  adequate  revenue.  The  moral  obligation  slowly  becomes  a 
legal  obligation,  keeping  pace  with  the  crystallization  of  social 
usage  and  custom  into  primitive  law;  the  voluntary  offerings 
become  compulsory  coiitributions.  But  the  compulsory  con- 
tributions are  still  largely  personal  services,  connected  with 
the  common  security.  Such  was  the  early  mediaeval  trinoda 
necessitas,  the  liability  to  military  service,  to  watch  and  ward, 
and  to  the  repair  of  the  bridges  and  fortifications.  The  first 
forced  contribution  of  the  individual  to  the  maintenance  of  the 
common  welfare  is  always  seen  in  this  rude  attempt  to  assess 
every  one  according  to  his  ability  to  bear  the  common  burden — 
his  faculty.  This  faculty  consists  in  the  enforced  participation 
in  the  administration.  But  there  is  not  yet  any  idea  of  taxation  ; 
of  property.  The  contribution  is  personal,  and  is  limited  to  a 
few  well-defined  objects.  The  individual'^,  faculty  is  found  in  "^ 
his  person,  not  in  his  property,  because  there  is  practically  no 
"privafe  property.  And  the  contributions  are,  for  the  most  part, 
not  regular,  but  spasmodic. 

As  civilization  gradually  advances,  private  property  develops,] 
and  the  primitive  equality  slowly  disappears.  The  interchange 
of  commodities  takes  place  on  a  larger  scale.  The  old  revenues 
are  no  longer  adequate,  and  it  becomes  necessary  for  the  mon- 
arch to  supplement  them  by  broadening  the  field  of  these 
compulsory  contributions  of  service.  In  other  words,  the  need 
of  taxation  arises.  But  a  direct  taxjs  still  out  of  the  question.  - 
Public  opinion  will  not  yeTaHrniTits  necessity.  The  taxation 
of  property  is  scarcely  less  impossible  than  the  taxation  of  the 
person.  It  is  regarded  as  a  badge  of  disgrace  for  the  freeman — 
a  nota  captivitatiSj  as  the  Romans  at  first  called  it — ^because 
only  conquered  enemies  have  to  pay  this  arbitrary  impost. 
The  king,  therefore,  must  endeavor  to  effect  his  object  cov- 
ertly. He  must  go  to  work  in  a  roundabout  way,  and  hide 
the  tax  in  a  variety  of  disguises.  He  either  gradually  extends  / 
his  lucrative  prerogatives,  or  alleges  that  the  charges  are  sim- 
ple returns  for  governmental  services.  He  grants  protection 
or  privileges  to  individuals,  and  requires  some  payment  in 
return.  Thus  begins  the  period  of  fees  and  charges,  which  the 
individuals  are  willing  to  pay  and  which  gradually  reconcile 
the  public  to  the  idea  of  governmental  charges. 

Before  long,  however,  the  monarch  feels  able  to  throw  off  all 
disguises,  and  limits  the  amount  of  his  exactions  only  by  the  de- 


t 


n 


I  ■ 


I 


I 


f 


\ 


4  ESSAYS  IN  TAXATION 

gree  of  his  rapacity.  Thus  the  fees  and  tolls  change  into  taxes 
on  exchange  and  transportation;  thus  the  people  become  ac- 
customed to  the  ''customs";  thus  the  **evil  duties  "and  the  ex- 
cises grow  apace;  thus  the  payments  become  veritable  ''imposi- 
tions." In  other  words,  the  community  enters  upon  the  stage 
oTlndirect  taxation. 

This  explains  why  it  is  so  difficult  for  the  idea  of  direct  tax- 
ation to  force  its  way  into  popular  favor.  The  earliest  mani- 
festations of  the  taxing  power  are  generally  merciless  and  bru- 
tal. They  are  apt  to  react  on  the  public  consciousness  and 
to  stunt  the  growth  of  any  feeling  of  obligation.  It  is  not  un- 
til public  morality  has  so  far  developed  as  to  introduce  more 
lenient  and  more  refined  processes  of  indirect  taxation  that 
we  discover  a  growing  willingness  on  the  part  of  the  individual 
to  pay  direct  taxes.  Another  reason  for  the  later  appearance 
of  direct  ta,xation  is  that  the  indirect  taxes  are  often  paid  with- 
out the  contributors  being  really  conscious  of  it.  They  are 
jealous  oT  their  own  anH  Bot  public-spirited.  They  are  willing 
to  give  only  that  the  loss  of  which  they  do  not  feel.  But  what- 
ever be  the  reason,  it  is  clear  that  when  this  final  stage — pos- 
sible only  after  centuries  of  laborious  and  continued  exertion — 
has  been  reached,  we  enter  upon  a  new  phase  in  the  history  of 
finance.  The  readiness  to  share  in  the  public  burdens  out  of 
one^s  property  presupposes  a  far  higher  social  ethics  and  a  far 
more  complex  society  than  was  possible  in  the  simple  condi- 
tions when  every  one  was  willing  to  take  part  in  the  defence  of 
the  village  or  the  repair  of  the  roads.  Interests  have  now  be- 
come specialized.  It  needs  a  far  greater  sense  of  civic  obliga- 
tion to  submit  cheerfully  to  direct  property  taxation  than  was 
necessary  in  primitive  times  for  the  putting  forth  of  mere  per- 
sonal exertions.  Even  to-day  the  full  import  of  this  obligation 
is  only  inadequately  grasped.  Until  within  a  few  years  it  was 
deemed  necessary  to  base  the  theoretical  justification  of  tax- 
ation on  fanciful  doctrines  of  contract,  of  protection  and  the 
like.  And  even  at  the  present  time,  those  who  cheerfully  seek 
to  contribute  their  share  to  the  common  burden  form  the  ex- 
ception, not  the  rule.  But  even  the  imperfect  recognition  of 
this  duty  implies  a  highly  developed  political  consciousness. 
The  method  of  taxing  every  one  according  to  his  property  is 
the  first  rough  attempt  of  a  property-owning  community  (as 
over  against  a  primitive  community)  to  assess  each  member 
according  to  his  relative  ability.    The  introduction  of  the  direct 


THE  DEVELOPMENT  OF  TAXATION  5 

property  tax  is  a  va.t  step  forward  in  the  development  of  social 

^^Thls  historical  process  is  well  illustrated  by  etymology.    If 
:  we  look  afr  vari^^^  terms  applied  to  what  we  to^ay  call  a 
r^,  we  stall  find  every  shade  of  the  development  refle^^^^^^^^ 
only  in  the  words  used  in  former  centuries,  ^ut  m  those^^^^^^ 
employed  to-day.    There  are  no  less  than  seven  different  stages 

in  this  etymological  growth  individual  made  a     / 

The  original  idea  was  that  of  sik   The  mdiviauai  ^^^  i 

one  time  used  for  all  kinds  of  taxes.    1  he  ^ame  lae 

in  the  English  subsidy  and  contnbviion.    It  has  sumveu 

monly  used  as  synonymous  with  tax. 

The  fourth  stageotdeyelopment  bnn^  out  he  >^^^J|^ 

restricted  to  its  present  narrow  meaning  m  \^^^^^^J^'^;^ 
Here  it  is  usually  applied  to  import  taxes  "^^^  somejrn^  to  the 
internal  revenue  taxes.  But  even  to-day  J?f ^.f^'t'^^^.Vl^^ 
mcludes  some  of  the  most  important  «°^,f  .^„  J'^f  "^iX  ,b^th 
the  inheritance  tax  and  the  income  tax.  It  is  «»*  ^^J^^^^^^^^^ 
stage  is  reached  that  we  meet  the  idea  of  ^^S^^^  "^^ 
part  of  the  state.  We  see  this  m  our  impost  or  «P~' ^ 
well  as  m  the  French  impSt  and  the  Itahan  ^^^ t^nth  t e  H 
we  limit  the  term  to  a  certam  kind  of  tax.  the  French  use  it 


^ 


r 


^ 


k 


ESSAYS  IN  TAXATION} 

as  the  generic  epithet  par  excellence.  The  same  idea  is  seen  in 
the  German  Auflage  (something  *4aid  on")  and  Aufschlag 
(something  ''clapped  on"),  frequently  used  at  present  for  cer- 
tain indirect  charges  on  commodities. 

With  the  seventh  and  final  stage  we  reach  the  idea  ofji  rate 
or  assessment^  fixed  or  esthBat^^^  ^^y  ^hp  govemmenrwithout 

ttie  mediaeval  English  scot  (to  be  ''at  scot  and  lot"),  which  is 
nothing  but  the  German  Schoss  or  the  Scandinavian  skatt.  It 
is  seen  in  the  German  Schdtzung  (or  estimate),  which  was  used 
until  about  a  century  ago.  Above  all,  it  is  recognized  in  our 
tax  {taxarcj  to  fix,  to  estimate),  the  French  taxe,  the  Italian 
tassa  and  the  English  rate.  It  is  worthy  of  note  that  in  the  mid- 
dle ages  "tax"  always  meant  a  direct  tax,  for  which  a  regular 
assessment  list  or  schedule  was  made. 

II.  Direct  versiLS  Indirect  Taxation 

Witb  the  introduction  of  direct  taxation,  the  progressive  in- 
j  crease  of  public  revenues  becomes  far  easier.  This  is  fortunate, 
for-wtthrthe  advance  ot  civilization  the  public  expenditures 
grow  apace.  For  a  long  time,  as  we  have  seen,  almost  the  only 
aims  of  government  are  security  and  defence.  But  as  economic 
conditions  develop  and  various  classes  of  society  differentiate, 
more  attention  must  be  paid  to  matters  of  general  welfare. 
Expenditures  for  commerce,  industry  and  transportation  arise. 
The  need  is  felt  for  better  roads,  for  more  canals,  for  improved 
methods  of  communication  through  the  postal  service.  Then 
the  less  material  ends  of  government  are  recognized.  Educatiori 
must  be  provided,  hospitals  and^asylums  must  be  erecteST^d 
the  sanitary  conditions  must  be  looked  after.  Finally  comes 
the  immense""grow|Ii  of  tha.  modern  state,  with  its  new  func- 
tions due"  pafHy  to  the  industrial  revolution,  partly  to  the 
growth  of  democracy,  partly  to  the  reco^ition  jiL  legis]ation 
of  the  preventive  "as  against  the  repressive  principle.  These 
new  functions  mean  fresh  expenditufesTand  these  expenditures 
)  mean  increased  taxes.  Thus  the  characteristic  mark  of  the 
modem  age  is  taxation  as  against  the  more  or  less  self-sufficing 
public  economy  of  former  times. 

Direct  taxation,  as  we  have  seen,  generally  forms  the  last 
step  in  the  historical  development  of  public  revenues.  At 
first  regarded  entirely  as  an  extraordinary  means  of  support, 
it  gradually  assumes  the  character  of  an  ordinary  form  ot 


'  1 

i 


THE  DEVELOPMENT  OF  TAXATION  7 

revenue.  In  the  early  days  of  classic  antiquity  the  direct  tax 
was  used  only  in  very  exceptional  exigencies  and  was,  in  fact, 
regarded  as  a  compulsory  loan,  to  be  repaid  in  the  future.  It 
was  not  until  after  the  establishment  of  the  Roman  Empire, 
for  instance,  that  the  regular  direct  taxation  of  Roman  citizens 
began.  And  the  same  process  may  be  observed  throughout  the 
history  of  many  mediaeval  states  down  to  the  most  recent 
period  of  European  and  American  history. 

In  some  cases,  however,  this  historical  process  assumes  a 
slightly  different  form.  It  depends  entirely  on  the  economic 
conditions  and  on  the  relative  importance  of  the  various  social 
classes.  For  instance,  itjs  incontrovertible  that  certain  kinds 
of  indirect  payments  always  come  firet,  as  has  been  exf>lained 
above.  But  when  tTie  people  understand  that  indirect  charges 
on  commodities  increase  their  price  and  thus  form  veritable 
taxes,  it  sometimes  happens  that  more  opposition  is  shown  to 
indirect  than  to  direct  taxation.  In  such  cases  direct  taxes 
fumish~tEe~ofdinary  revenue,  and  it  is  only  after  a  severe 
struggle  that  indirect  taxes  are  introduced. 

This  process  can  be  clearly  traced  in  the  history  of  mediaeval 
and  modern  revenue.  In-democratic  communities,  where  the 
legislation  is  influenced  by  the  mass  of  the  people,  we  cj^nmonly 
■disce^^aTTendency  to  oppose^indirect  taxes  on  consumption. 
In  the  eariy  mediaeval  towns  the  democratic  instincts  were 
strong,  because  of  the  more  equal  distribution  of  property. 
We  accordingly  find  that  the  revenue  system  was  based  largely 
on  direct  payments,  and  that  the  populace  rebelled  against 
indirect  imposts.  But  on  the  continent7~where^~aristocratic 
influences  gradually  became  powerful  enough  to  break  down 
the  communal  liberty  and  democracy,  the  mass  of  the  people 
were  ground  down  by  taxes  on  the  necessaries  of  life,  while  the 
wealthier  or  governing  classes  practically  escaped.  When  the 
democratic  upheaval  took  place,  as  in  the  Italian  towns,  we 
find  an  attempt  to  reintroduce  the  old  order  of  things  and  to 
reach  the  wealthy  by  a  system  of  direct  taxes.  But  with  the 
downfall  of  the  mediaeval  democracy,  the  property  and  income 
taxes  disappeared,  while  the  octroi  and  municipal  indirect  taxes 
again  came  to  the  front.  Only  in  England,  where  the  democratic 
instincts  maintained  themselves  somewhat  more  strongly,  and 
where  the  power  of  the  aristocracy  was  held  in  check  by  a 
strong  monarchy,  do  we  find  continued  opposition  to  the  general 
excises  and  to  local  taxes  on  the  necessaries  of  life.    It  was  with 


I 


8 


ESSAYS  IN  TAXATION 


the  greatest  difficulty  that  the  excise  system  was  introduced. 
And  the  same  feeUng  was  awakened  under  similar  conditions 
on  the  other  side  of  the  Atlantic,  when  Hamilton  initiated  his 
system  of  indirect  taxation  or  internal  revenue  in  the  federal 
fiscal  system  of  the  United  States.  "The  time  will  come," 
said  one  of  the  members  of  Congress  in  1790,  ''when  the  poor 
man  will  not  be  able  to  wash  his  shirt  without  paying  a  tax." 
With  the  advent  of  the  modern  democratic  state,  we  notice  the 
same  tendency.  Indirect  taxes,  says  Lassalle,  are  taxes  on 
labor.  Hence  the  efiforts~of  modem  democracy  in  England, 
/-^ir-^witzerland  and  in  America  to  confine  indirect  taxes  on 
consumption  and  exchange  within  the  narrowest  limits. 

On  the  other  hand,  there  is  a  counter-tendency  which  has 
frequently  been  overlooked.    <3urious  as  it  may  seem,  indirect 
taxes^i'rere' advocated  in  the  later  middle  ages  as  the  means  of 
introducing  not  inequality,  but  equality,  of  taxation.     This 
was  owing  to  the  fact  that  the  privileged  classes  on  the  con- 
tinent had  succeeded  in  securing  virtual  immunity  from  taxa- 
tion.    The  nobles  were  largely  exempted  from  the  land  tax, 
while  the  clergy  and  the  wealthier  citizens  in  general  were  able 
to  a  large  degree  to  purchase  freedom  from  the  tax  burdens. 
What  was  more  natural  than  that  the  statesmen  and  tax  re- 
formers should  attempt  to  make  them  pay  something  through 
taxes  on  their  expenditure,  which  they  could  not  well  escape? 
Their  plan,  it  is  true,  no  longer  took  the  shape  simply  of  taxes 
on  the  necessaries  of  life;  it  was  now  expanded  into  the  single 
tax  on  all  expense  which  would  reach  the  rich  as  well  as  the  poor. 
This  was  the  idea  of  Colbert;  and  it  has  been  the  idea  from  the 
time  of  Hobbes  and  Petty  of  all  enthusiasts  for  indirect  taxa- 
tion in  England,  and  of  many  writers  in  Germany,  in  France 
and  in  Italy.    To-day  we  are  clamoring  for  the  abolition  of  in- 
direct taxation;  formerly  the  reformers  clamored  for  a  single 
universal  indirect  tax.    The  explanation,  as  we  see,  is  simple. 
But  this  does  not  yet  answer  the  question  why  excise  taxes 
were  actually  introduced  into  England,  as  elsewhere,  in  the 
seventeenth  century.     The  fact  is  that  tax  reformers  cannot 
do^nrach  good  if  economic  conditions  are  not  ripe  for  their  pro- 
posals.   It  must  be  confessed  that  according  to  the  experience 
of  history  most  reforms,  in  finance  at  least,  are  due  to  selfish 
reasons;  they  are  the  necessary  outcome  of  changes  in  economic 
relations  and  of  the  efforts  of  each  class,  whether  it  be  the  small 
or  the  large  class,  to  gain  some  advantage  for  itself.    The  classic 


THE  DEVELOPMENT  OF  TAXATION 


9 


home  of  the  excise  tax  or  indirect  tax  on  business  and  trade 
is  Holland.  It  is  well  known  that  Holland,  during  the  sixteenth 
and  seventeenth  centuries,  had  become  the  leading  financial 
and  trading  nation  of  Europe.  In  the  other  countries  wealth 
was  still  centered  in  the  landed  mterests,  and  the  whole  system 
of  taxation  was  largely  dominated  by  feudal  aristocratic  ideas. 
The  direct  taxes  were  land  taxes,  because  wealth  consisted 
chiefly  of  land;  but  the  landed  proprietors  sought. to  escape  the 
burden  by  assessmg  real  property  as  low  as  possible  and  by  put- 
ting taxes  on  the  necessaries  of  life  of  the  poorer  classes.  In 
Holland,  on  the  other  hand,  wealth  was  now  largely  centered 
in  the  moneyed  interest.  The  great  traders  and  merchants  did 
not  relish  any  direct  taxation  of  trading  capital,  and  therefore 
devised  a  system  of  indirect  taxation  of  business  which  would, 
as  they  thought  and  hoped,  be  shifted  to  the  community  in 
general,  and  to  the  poorer  classes  in  particular.  Thus  developed 
the  stamp  taxes,  the  excise  taxes,  and  the  whole  host  of  indirect 
taxes  for  which  Holland  was  noted. 

The  seventeenth  century  marks  the  rise  of  the  trading  class 
in  England;  ''the  glorious  revolution"  was  a  revolution  not  so 
much  of  the  people  as  of  what  the  Socialists  love  to  call  the 
"bourgeois."  Puritanism  and  conmierciaUsm  went  hand  in 
hand,i  and  the  downfall  of  the  Stuarts  not  only  put  an  end  to 
feudalism,  but  weakened  the  fiscal  ascendency  of  the  land- 
owner— an  ascendency  to  which  another  serious  blow  was  given 
by  the  abolition  of  the  Com  Laws,  and  whose  final  overthrow  in 
England,  as  elsewhere,  is  fast  approaching.  The  indirect  taxes 
of  the  seventeenth  century  were  thus  theoutgrowth^JJie  effort 
on  the  partj^^he^eomnlercial  classes  to  escape  the  burdens 
which  the  landowners  werT  desirous  of  placing  on  them.  The 
selfishTdesigns  of  the  capitalists  and  the  unselfish  ideas  of  the 
tax  reformers  went  hand  in  hand  to  widen  the  scope  of  indirect 
taxes.  And  as  the  trading  class  developed  in  the  other  coun- 
tries^ the  system  of  excise  spreadwith  it."^  11  wi^^norunfiTthe 

1  This  aspect  of  Puritanism  has  more  recently  been  studied  in  detail  by 
Professor  Max  Weber  in  a  series  of  suggestive  articles  "  Die  protestantische 
Ethik  und  der  *  Geist '  des  Kapitalismus  "  in  the  Archiv  jilr  Socialwisscn- 
8chaft  und  Sozial-politik,  vols,  xx  and  xxi  (1905). 

2  A  word  may  be  said,  in  passing,  about  our  present  attitude  toward  indi- 
rect taxes.  There  is  a  prodigious  amount  of  cant  on  this  topic.  Many 
thinkers  are  apt  to  make  common  cause  with  the  socialists  and  the  single- 
taxers  in  demanding  the  complete  abolition  of  the  so-called  indirect  taxes. 
This  is  a  mistake.    There  is  nothing  inherently  bad  about  an  indirect  tax, 


10 


ESSAYS  IN   TAXATION 


\ 


democratic  movement  of  the  nineteenth  century,  when  the  sys- 
tem of  excises  was  recognized  as  a  burden  on  the  poorer  classes, 
that  the  number  of  commodities  subject  to  excise  was  gradually 
reduced. 

III.  The  Forms  of  Direct  Taxation 

"We  have  seen  the  economic  relations  which  condition  the 
interworking  of  direct  and  indirect  taxation.  Let  us  now  en- 
deavor to  learn  how  these  economic  conditions  affect  the 
growth  of  direct  taxation  itself. 

In  primitive  society,  there  is  a  certain  rough  equality  in  the 
personal  status  and  the  personal  abilities  of  the  Individual. 
Hence  the  idea  of  the  poll  or  capitation  tax^  which  is  the  first 
rude  manifestation  of  the  equities  of  taxation.    The  members 
of  a  club  to-day  pay  equal  dues,  because  their  interests  are 
supposed  to  be  equal.    Club  life  does  not  cover  the  whole  of 
human  activity,  but  only  a  very  small  portion  of  it.    So,  in  the 
same  way,  as  long  as  eccmomic- conditions  are  primitive,  the 
social-obligations  of  the  members  of  the  clan  or  Ihe  stste  are 
conceivedjo  be  eq^ial.    But  as  the  social  conscience' He vetops, 
more  stress  islaid  on  other  elements  of  ability  to  pay  than  on 
mere  number.    Not  only  do  men  differ  in  strength,  in  mental 
vigor  and  in  opportunities,  but  inequality  of  possessions  grows 
greater.    And  with  differences  in  property,  the  old  feeling  of 
equal  obligation  weakens.     The  poll  tax  becomes  unjust  and 
is  gradually  abolished.    A  certain  phase  of  this  prunitive  feeling 
sometimes  persists  for  a  long  time,  especially  in  democracies 
where  political  equality  is  still  based  on  the  fiction,  of  economic 
equality.    We  find  poll  taxes  as  adjuncts  to  other  taxes  long 
after  the  justification  of  a  single  poll  tax  has  disappeared.    But 
it  has  now  assumed  a  political  significance,  as  in  Switzerland, 
and  in  some  of  the  American  commonwealths,  where  its  pay- 
ment is  made  a  condition  of  the  suffrage.     Even  this  tends 
to  become  a  farce  to  the  extent  that  the  payment  of  the  tax  is 

jp4&^fchere~aaythinginhej£iitljLgo^^  tax.    It  depends  en- 

tirely upon  what  kind^ordirectormclirect  taxltls.  A  direct  tax  on  the 
laborer  is  not  necessarily  good  because  it  is  direct;  an  indirect  tax  on  the 
luxury  of  the  rich  is  not  necessarily  bad  because  it  is  indirect.  It  happens, 
indeed,  that  most  of  the  indirect  taxes  of  the  past  have  been  devised  by 
the  powerful  in  order  that  their  burden  might  fall  on  the  weak;  but  it  is  by 
no  means  impossible  to  frame  a  system  of  taxes  on  consumption  which  will 
supplement  other  taxes  and  do  substantial  justice  to  all.  The  elaboration 
of  this  point  must  be  reserved  for  another  place. 


THE  DEVELOPMENT  OF   TAXATION 


11 


h 


assumed  by  the  political  parties.  The  ejconomiaj^asis  of  4he 
pqlUax  has  entirely  vanished  and  it  tends  to  be  replacedi)y  the 
property  tax. 

The  first  property  taxes  are  entirely  in  harmony__witiL  the 
facts  of  early  industrial  life.    It  is  a  matter  of  common  knowl- 
edge  that   the    early  period  of   almost  every  civilization  is 
marked  by- iwo_chief  facts,  the  preponderance  of  agriculture 
and  the  existence  ofslavery.    As  Rodbertus  has  pointed  out,^ 
this  leads  to  a  fundamental  distinction  between  ancient  and 
modem  economic  theories.     In  modem  civilization  we  have 
not  only  a  quantitative  division  in  wealthrbttt-alsora  qriaiitative 
difference.    That  is,  not  only  are  there  rich  and  poor,  but  there 
arelandowners,  capitalists,  employers  and  laborers.    In  early  civ- 
ili^iOTMbherewas a  quantitative,but Jiajyialitntive'^diatmction 
in  wealth,    Property  consisted  chiefly  of  land  and  the  land- 
owner's household,  including  slaves  and  beasts  of  burden.    There 
was  no  import^itca^itaJ^-or  at  all  events,  no  industrial  capi- 
tal-^apart~-froi5~tHis  landed  property,  and  hence  there  were 
-no^  distinct  shares_Jn_distribution.      But   Rodbertus^rs  in 
predicatTng^oT  Greece  in  general  and  designating  by  the  Greek 
name  an  economic  system  which  is  characteristic  of  all  early 
civilizations.    It  was  as  true  of  the  slave-holding  states  in  the 
American  Union,  and  of  the  mediaeval  manorial  system,  as  it 
was  of  the  early  Hellenic  civilization.    Wherever  we  find  only 
agriculture  and  slavery ,jtherejwe^^ 

of  collective  property,  not  yet  spHt  up  into  its  constituent  parts. 
Thelmportance  of  this^oT^mnic^-^"^sTiere :  since  weTiave 
only  this  general  collective  property,  and  since  this  property 
consists  practically  of  land  and  the  means  to  till  the  land,  the 
direct  property  tax  must  take  the  shape  either  of  the  land  tax 
or  of  the  tax  on  the  cattle  or  slaves  or  implements  used  in 
agriculture.  These  are  practically  tantamount  to  each  other. 
For  the  produce  of  two  given  portions  of  land  will  vary  about 
in  proportion  to  the  value  of  the  land,  together  with  the  amount 
of  slaves  and  cattle  necessary  to  till  it.  Everywhere^  at.  first, 
therefore,  the  direct  property  tax  is  found  to  be  either  the  land 
tg;^  or  the  tax  on  agricultural  capital.^   Ttis  fKeronFy  practi- 

*  "Untersuchungen  auf  dem  Gebiete  der  Nationalokonomie  des  klaa- 
sischen  Alterthums,"  in  Hildebrand's  Jahrbiicher  fur  Nationalokommiie  und 
^totishk,  IV.,  p.  343  et  seq. 

2  In  some  of  the  early  mediaeval  tax  systems,  these  were  specifically 
termed  cattle  and  land  taxes.    So  the  Vieh-und  Klauensteuer  in  Germany. 


i/ 


12 


ESSAYS  IN  TAXATION 


THE  DEVELOPMENT  OF  TAXATION 


13 


I 


i 


cable  and  the  onlyjustjqrm  of  taxation  at  this  early  period. 
It  isThmreyer,  important  to  notlcTthat  the  property  which 
is  now  taxed  is  not  so  much  property  m  land  as  propextyiiUhe 
producenjHandr-^^  have  the  primitive  village  com- 

munity or  only  the  system  of  common  cultivation,  the  earliest 
private  property  consists  of  the  produce  of  the  soil.  The  first 
attempt,  therefore,  to  take  account  of  the  gradations  m  the 
tax-paying  ability  of  the  individual  is  seen  in  the  tax  on  gross 
j^r^duce— the  tithe  or  any  other  portion  of  the  produce,  or 
on  mere  quantity  of  the  land  irrespective  of  value.  Since  land 
itself  is  not  private  property,  since  land  is  not  bought  or  sold, 
the  faculty  of  the  taxpayer  can  be  measured  not  by  the  value  of 
the  land,  but  by  the  value  of  its  produce,  which  is  in  some 
proportion  to  the  quantity  of  the  land.  Moreover,  in  early 
agriculture,  where  tilling  is  extensive  and  where  expenses  of 
cultivation  vary  but  little,  the  tax  on  gross  produce  is  a  fairly 
accurate  test  ofability  to  pay.  ~ 

^*Ji  t^e  advance  in  population  and  the  necessity  of  more"^ 
intensive  agricultural  methods,  owing  to  the  decay  of  the  primi-  / 
tive  communal  system  and  the  growth  of  private  property  m{ 
land,  it  becomes  possible  to  measure  the  productivity  of  land  J 
in  terms  of  property.    Thus  the  land  taxes  of  this  newer  stage  > 
of  culture  are  property  taxfis,  even  ^thougirthe" Value  of  the 
property  is  fixed  sometimes  according  to  selling  value,  some- 
times according  to  arbitrary  estimates  of  quality.     But  where 
the  survivals  of  primitive  conditions  are  strong,  the  value  is 
still  measured  in  terms  of  yield  or  produce,  either  actual  or 
computed.    In  the  early  middle  ages,  for  instance,  land  taxes 
were  not  based  directly  on  the  selling  value,  because,  although 
land  was  private  property,  it  was  not  bought  or  sold.     The 
lands  had  rental  value,  but  no  selling  value,  and  the  tax  was 
assessed  not  so  much  on  the  market  value  as  on  the  produce  of 
land.     When  the  American  colonies  were  founded,   private 
property  in  land  was  well  established  and  the  land  taxes  there 
very  soon  became  property  taxes,  although  we  not  infrequently 
find  examples  of  the  taxation  of  gross  produce  rather  than  of 
property.!    With  the  progress  of  cultivation  and  the  advance 
m  population,  the  tax  on  gross  produce  is  supplanted  by  the 
property  tax  on  market  value. 

1  For  details  see  the  article  on  "Income  Taxes  in  the  American  Colonies  " 
Pohtical  Science  Quarterly,  vol.  x.  (1895),  pp.  233,  234.  This  is  reprinted  in 
Sehgman,  The  Income  Tax,  191 1,  part  ii,  chap.  i. 


But  now  comes  a  change  in  the  forms  of  economic  life — a 
change  that  inevitably  produces  an  effect  on  the  public  con- 
science and  on  the  accepted  ideas  of  justice.  In  the  first  place, 
with  increasing  prosperity  we  find  a  gradual  increase_in  the 
simpler  kinds  of  personal  property.  The  landowner's  family 
gradually  accumulates  money,  clothing,  and  luxuries.  If  the 
general  property  tax  is  still  to  continue  a  fair  evidence  of  in- 
dividual ability  to  pay,  personal  property  must  be  taken  up  into 
the  assessment  lists.  And  this,  in  fact,  everywhere  occurs. 
Notify  tha^real  estate,  but  also  the  growing  personal  estate, 
is  now  regarded.  At  first  this  personalty  will  consist  of  tangible, 
visible  objects  not  easily  concealed,  and  constituting  a  fair 
index  of  the  citizen's  prosperity.  The  existence  of  this  scanty 
stock  of  personalty  will,  however,  still  be  in  harmony  with 
the  early  economic  system.  It  is  still  the  landowner  who  owns 
the  personal  property,  and  it  is  fitting  that  there  should  still  be 
only  the  general  property  tax.  The  economic  system  has  not  yet 
materially  altered. 


The  next  change,  however,  inaugurates  a  widely  different 
stage.  The  primitive  family  group  or  manorial  system  decays. 
Slavery  is  gradually  broken  down  by  manumission  or  abolition. 
The  commercial  instinct  grows  stronger,  and  tr^de  is  no  longer 
limited  to  the  interchange  of  superfluities  between  adjacent 
households.  What  Aristotle  decries  as  the  gainful  pursuits 
become  common  occupations.  Capital  develops  and  free 
laborers  appear.  The  original  undifferentiated  mass  of  property 
splits  up  into  separate  parts.  The  landlord  is  no  longer  the 
property  lord.  Personal  prgpeife-in^Jthe,  shape  bothofj 
ductiv^^apitaJ^BLdjof  jmprod^  / 

tinually  accelerating  ratio!     Finally,  as  in  our  modem  indus-l 
trial  system,  the  ^aovables  outrank  theimmovables.     ^^alty  ( 
is_  completelyovershadowed  by  personaKyf^both  extent  and 
influence.  '  """ 

Now  begins  the  contest  between  the  landed  and  the  moneyed 
interest,  between  rent  and  profit.  The  landowners  in  medi- 
aeval times,  like  tEeTaraiers  m  our  own  time,  vainly  attempt  to( 
expand  the  original  property  tax  so  as  to  include  all  these  new  \ 
forms  of  property.  The  capitalist  and  moneyed  class  either 
seek  to  shift  the  burden  by  devising  the  indirect  tax  of  which 
we  have  spoken  above,  or  they  attempt  to  escape  the  burden 
entirely  through^  evasion  or  through  lax  administration  of  the 
property  tax,    WHere'fhe  differences  in  wealth  become  striking 


y 


0 


14 


ESSAYS  IN  TAXATION 


V 


and  the  lower  classes  are  politically  powerless,  the  landed  propri- 
etors and  the  traders  combine  to  throw  the  burden  on  the 
agricultural  laborers  and  the  urban  artisans,  although  they 
may  still  struggle  between  themselves  as  to  the  division  of  the 
remainder  of  the  burden.  Where  aristocratic  conditions  prevail 
less  strongly,  as  in  America  up  to  the  present  time,  the  laborer 
^  fares  better,  but  the  contest  between  the  farmer  and  the  city 
resident  assumes  a  more  acute  form.  The  history  of  modem 
taxation  is  largely  the  history  of  these  class  antagonisms. 

IV,  Changes  in  the  Basis  of  Taxation 
In  the  meantime  the  test  or  standard  of  individual  ability 
has  itself  undergone  a  change.    With  th^  grQa[iiig_dif[erentiation 
^    of  society,  the  productive  powers  of  the  various  classes  them- 
j  selves  differ.    Moreover,  there  are  now  many  forms  of  earnings 
'j   which  are  derived  not  from  property,  butJrQm^dustry.    And 
since  it  is  difficult  to  capitalize  industry,  it  is  the  product  of  the 
industry  which  now  becomes  of  importance.    But  there  is  a 
decided  difference  between  this  new  system  of  taxes  on  product, 
and  the  original  system  which  preceded  the  first  property  tax! 
In  the  original  system  the  tax  was  on  gross  produce  or  on  mere 
I  ^^lBj!SL2!_l25^    The  land  tax  was  either  the  tithe  or  some 
y  defimtepart  of  the  estimated  produce.    Now  the.taxJ&j3n  net 
produce,   Allowanoe  is  made  for  expenses  of  cultivation.   Two 
pieces  oHand  may  yield  the  same  amount,  and  yet  the  outlay 
m  the  one  case  may  have  been  considerably  more  than  the  other, 
.  'To  takejiet^jnstead^ofgi^^  marks  another  step  for- 

I  ward  in  the  evolulioh  of  theld^Tof  ability  to  pay.  In  a  state 
of  complete  mobility  of  capital  and  labor,  it  perhaps  makes  no 
difference  whether  we  take  the  market  value  or  the  net  product 
of  a  piece  of  property;  for  tha^eUing  price. of  property  tends  to 
equaJahe  capitalized  value  of  the.  revenue  derived  therefrom. 
But  in  actual  life,  wTiere  we  often  find  limitations  to  this  absolute 
mobilitsr,  i:here  may  be  a  divergence  between  the  capitalized 
value  of  the  produce  and  the  actual  value  of  the  property. 
Thus  we  find  almost  everywhere  a  movement  to  replace  the 
property  tax  by  a  system  of  taxes  on  net  product— on  the 
product  of  land,  of  capital,  of  business,  of  labor,  etc.  This  was 
the  stage  reached  in  Europe  toward  the  end  of  the  eighteenth 
and  the  beginning  of  the  nineteenth  century. 

Relatively  good  as  this  system  was,  it  was  soon  seen  not  to 
be  entirely  satisfactory.     It  failed  to  respond  to  modem  eco^ 


H 


THE  DEVELOPMENT  OF  TAXATION 


15 


nomic  conditions.  It  looked  at  the  produce  of  the  source  of 
industry,  rather  than  at  the  recipient  of  the  earnings;  it  was  a 
tax  on  things,  rather  than  on  persons;  it  abstracted  from  the 
personat  situation  of  the  taxpayer;  it  made  no  allowance  for 
indebtedness.  Just  as  the  tax  on  gross  produce  was  defective 
because  it  paid  no  attention  to  expenses  of  cultivation,  so  the 
tax  on  net  produce,  while  in  itself  an  improvement,  was  never- 
theless faulty  because  it  paid  no  attention  to  what  may  be 
called  the  personal  expenses  of  cultivation,  i.e.  the  interest  on 
indebtedness. 

Thus  it  is  that  in  recent  decades  the  tendency  has  arisen  to 
substitute  personal  taxes  for  the  older  real  taxes,  and  to  assess 
the  individual  rather  than  the  thing;  or,  stating  it  in  simpler 
language,  to  put  revenue  or  income  injthejglaceof  proceeds  or 
earnings  as  the  test  of  taxation.  Just  as  a  man  s^itbiHty- to 
support  himself  or  his  family  is  seen  in  his  income  or  revenue, 
so,  in  the  same  way,  it  is  recognized  that  the  test  of  a  man's 
ability  to  support  the  state  is  to  be  found  in  this  same  income 
or  revenue.  From  the  modem  point  of  view,  it  is-the  duty  of 
the  citizen  to  support  the  government  according  to  his  capacity 
to  supportjiiinself ,  Income  or  "revenue  may  not,  indeed,  be  an 
ideal  test;  ^  for  there  is  no  absolute  test  which  can  exactly  gauge 
all  the  varying  personal  circumstances  of  each  individual. 
But  it  is  the  best_workable_test  that  governments  can  secure, 
and  it  is  in  harmony  with  the  test  imposed  on  the  individual 
by  the  force  of  social  opinion  in  regard  to  his  duty  to  his  own 
family.  For  this  reason  modern  states  are- every  where  changmg 
their  revenue  systems,  so  that  the  taxes  shall  correspond,  as 
nearly  as  possible,  tq  the  revenues  of  the  citizens,  ^ut  pre- 
cisely because  the  income  tax  is  a  pefsonaTrather  than  an  im- 
personal tax  or  a  tax  on  things,  it  involves  administrative  difficul- 
ties and  presupposes  an  advanced  stage  of  socialjnorality  and 
political  probity.  Where  this  stage  has  not  yet  been  reached,  it 
may  be  better  to  continue  the  system  of  taxes  on  product  which 
form  a  very  rough  approximation  to  the  revenue  of  the  tax- 
payer, than  to  attempt  a  system  of  income  taxes  which  strive  to 
reach  the  revenue  more  closely.  Furthermore,  as  we  shall  see  in 
a  subsequent  chapter,  there  are  certain  considerations  which 
militate  against  the  exclusive  adoption  of  individual  faculty  as 
the  all-controlling  norm  of  taxation.    But  whatever  may  be  the 

^  For  some  of  the  difficulties  connected  with  the  theory  of  the  income 
tax  see  Seligman,  The  Income  Tax,  1911,  Introduction,  §  4,  et  seq. 


\ 


V 


w 


16 


ESSAYS  IN  TAXATION 


momentary  demand  of  expediency,  or  the  influence  of  counter- 
vailing considerations,  the  line  of  development  is  evident,  and 
the  ultiinate  result  must  necessarily  harmonize  with  the  facts 
of  economic  and  social  relations.  " 

Let  us  test  the  theory  of  development  as  laid  down  in  the 
above  pages  by  a  reference  to  the  history  of  taxation  in  America. 
It  is  well  known  that  the  primitive  revenues  of  the  colonies  were 
composed  largely  of  voluntary  payments,  of  subsidies  or  allow- 
ances from  abroad,  of  quit-rents,  and  of  occasional  fees  and 
fines  of  early  justice.  But  it  has  usually  been  overlooked  that 
when  the  voluntary  offerings  turned  into  compulsory  contribu- 
tions, the  tax  systems  in  the  various  colonies  were  quite  different. 

The  New  England  colonies  were  democratic  communities 
where  almost  every  one-nwned jsome  Jand,  and  where  the  dis- 
tribution of  property  Has Jairly  equal.  We  therefore  find  as 
a  characteristic  mark  of  New  England,  in  addition  to  the  primi- 
^?J^l^  ^^^'  the  tax  on  jthe  gross  produce  of  land  either  actual 
or  computed  according  tolhe  guantirynoTqualiry'T)?  tlift  InnH 
This  slowly  grew  into  a  real  property  tax,  which  soon  expanded 
into  what  was  nominally  a  general  property  tax.  And  this  itself 
was  supplemented  by  a  tax  on  town  artisans  and  others  who 
subsisted  on  the  produce  not  of  their  property,  but  of  their 
exertions.-  To  the  property  tax  was  now  added  the  "faculty  " 
tax.* 

In  the  Southern  colonies,  which  were  aristocratic  in  their 
economic  substratum,  the  landJax.playBd_aninsignificant  r61e, 
because  the  large  landowners  naturally  objected^  bearhig  the 
burdens.  After  the  mtroduction  of  slavery  it  became  difficult  to 
retain  even  the  poll  tax,  which  when  laid  on  slaves  is  practically 
a  property  tax  on  the  slave  owner.  Hence  we  see  a  system  of 
indirect  taxes,  mainly  on  exports  and  imports,  falling  with 
special  weight  on  the  poorer  consumers. 

Finally,  in  the  middl£coIonies,  above  all  m  New  Netheriands, 
the  conditions  were_i^2Eer  demo"cratic  nor  aristocratic.  There 
was  no  such  approach  to  equal  distribution  of  wealth  as  in  New 
England,  and  no  such  preponderance  of  the  landed  interest  as  in 
Virginia.  We  find  the  dominance  of  the  moneyed  interest  or  of 
the  trading  classes,  who  brought  with  tEern  Dutch  mstincts 
and  Dutch  methods.  Accordingly,  there  was  no  system  of  poll 
and  property  taxes  as  in  New  England,  and  no  system  of  in- 

>  For  details  as  to  the  American  "faculty  "  taxes,  see  Seligman,  The  In- 
come  Tax,  1911,  pp.  367  et  seq. 


THE  DEVELOPMENT  OF  TAXATION 


17 


^^ 


direct  taxes  on  exports  and  imports  as  in  Virginia.  The  funda- 
mental characteristic  of  this  system  was  the  introduction  of  the 
excise  system  or  uidirect  taxation  of  trade,  which  was  borrowed 
from  Holland,  just  as  we  find  the  excise  system  introduced  from 
Holland  into  England  and  the  other  European  countries  during 
the  seventeenth  century.  Each  section,  therefore,  had  a  fiscal 
system  more  or  less  hi  harmony  with  its  economic  conditions. 
It  was  not  until  these  conditions  changed  during  the  eighteenth 
century  that  the  fiscal  systems  began  somewhat  to  approach 
each  other;  and  it  was  not  until  much  later  that  we  find  through- 
out the  country  a  general  property  tax  based  not  on  the  produce, 
but  on  the  market  value,  of  the  property. 

The  same  divergence  of  economic  conditions  explains  what 
is  to-day  the  most  marked  distinction  in  the  United  States 
between  the  fiscal  systems  of  the  North,  the  South  and  the  West. 
In  the  Southem^taAes  up  to  the  civil  war,  the  interests  of  the 
large  landed  proprietors  were  still  dominant.  Under  the  federal 
constitution,  it  was  impossible  for  them  to  levy  import  or  ex- 
port duties.  For  a  time,  therefore,  land,  as  the  only  source  of 
wealth,  had  to  defray  the  public  charges.  In  the  absence  of  in- 
dustrial centres,  there  was  little  opportunity  for  taxation  of 
personal  property.  As  the  need  of  increased  revenues  was  felt, 
the  landed  interests  attempted  to  secure  this  revenue  from  the 
few  ordinary  occupations  carried  on  outside  of  the  farms  and 
estates.  In  other  words^  the  license  or  privilege  system  was 
established,  which  levied  a  fixed  charge  on  well-nigh  every 
occtrpsfion.  It  was  not  until  after  the  middle  of  the  century 
that  the  general  property  tax  was  introduced;  but  even  to-day 
the  license  or  privilege  taxes  yield  a  large  share  of  the  public 
revenue. 

In  the  Northern  states,  on  the  other  hand,  where  the  business 
interests  were  more  powerful,  the  license  or  privilege  system  never 
attained  such  a  firm  foothold.  But  with  the  breakdown  of  the 
general  property  tax,  the  attempt  of  the  general  public  to  secure 
a  taxation  of  the  moneyed  interests  has  taken  the  form  of  taxa- 
tion  of  corporations  and  of  capital.  There  are  plainly  visible 
the  beginnings  of  a'system^TtSation  of  net  product.  Finally, 
in  the  Western  states,  where  the  economic  conditions  are  as 
yet  more  primitive,  there  have  been  only  sporadic  attempts  to 
alter  the  general  property  tax,  which  there  is  still  to  a  great  ex- 
tent^a  tax  on  real  estate.  But  with  the  gradual  unification  of 
economic  conditions,  which  is  slowly  taking  place  throughout 


18 


ESSAYS  IN  TAXATION 


I 


the  entire  country,  we  may  expect  that  the  systems  of  taxation 
\vill  become  more  nearly  miiform,  mitil  the  results  of  modern 
industrial  and  democratic  development  will  finally  appear  here, 
as  they  are  appearing  in  other  parts  of  the  world.  The  recent 
attempt  to  introduce  a  federal  mcome  tax,  however  defective 
the  measure  may  have  been,  is  a  significant  evidence  of  the  trend. 
That  this  attempt  will  ultimately  be  followed  by  others,  not 
necessarily  precisely  similar,  but  yet  indicative  of  the  same 
general  movement,  is  by  no  means  improbable. 

From  the  above  survey  one  fact  stands  out  prominently. 
Amid  the  clashing  of  divergent  interests,  and  the  endeavor  of 
each  social  class  to  roll  off  the  burden  of  taxation  on  some  other 
class,  we  discern  the  slow  and  laborious  growth  of  standards  of 
justice  in  taxation,  and  the  attempt  on  the  part  of  the  commu- 
nity as  a  whole  to  realize  this  justice.  The  history  of  finance, 
in  other  words,  shows  from  one  point  of  view,  at  least,  the  evolu- 
tion of  the  principle  of  faculty  or  ability  in  taxation— the  prm- 
ciple  that  each  individual  should  be  held  to  help  the  state  in 
proportion  ±Q  his  ability  to  help  himself.  In  the  earliest  indirect 
payments  there  was  nojdea  of  equity,  but  only  oTforce.  But 
with  the  advancg^oldynizatmn^  social  ethics,  we  reach  the 
first^^stage^LJnidfi  eouaE^^  tax.    Step  by  step  the 

revenue  system  advanced  to  successively  higher  planes.  Ex- 
penditure, property,  product— each  of  these  in  turn  was  con- 
sidered the  test  of  individual  capacity  and  obligation  toward 
the  state;  until  finally  in  modem  times  revenue  or  income  has 
come  to  be  regarded  as  the  most  equitable  and  the  most  practica- 
ble measure  of  individual  and  social  faculty.  To  arrange  a 
system  of  taxation  a  large  part  of  which  at  least  shall,  on  the 
whole,  correspond  as  closely  as  possible  to  the  net  revenues  of 
individuals,  and  which  shall  take  into  account  the  variations 
in  tax-paying  ability,  has  thus  become  a  demand  of  modem 
civilization.  But  unless  this  system  is  in  harmony  with  the 
extemal  structure  and  the  intemal  conditions  of  modem  eco- 
nomic fife,  it  is  foredoomed  to  failure.  If  the  history  of  taxation 
teaches  any  one  lesson,  it  is  that  all  social  ^id  moral  advance 
is  the  result  of  a  slow  process  and  that  while  fiscal  systems  are 
continually  modified  by  the  working  out  of  ethical  ideals,  these 
ideals  themselves  depend  for  their  realization  upon  the  economic 
forces  which  are  continually  transforming  the  face  of  human 
^society. 


CHAPTER  II 


i 


THE  GENERAL  PROPERTY  TAX 

There  is  perhaps  no  single  feature  of  our  modem  tax  system 
that  is  commonly  thought  to  be  more  thoroughly  American 
than  the  general  property  tax.  The  proportional  taxation  of 
all  property  is  held  to  be  the  result  of  an  instinctive  feeling 
original  to  and  thoroughly  ingrained  in  the  minds  of  the  Ameri- 
can people/ And  yet  it  may  be  said  that  few  institutions  have 
evoked  of  late  more  angry  protests  and  more  earnest  dissatis- 
faction than  this  very  tax.  The  reason  is  plain.  As  long  as 
prosperity  was  general  and  the  public  expenses  were  small, 
taxation  was  light  and  its  burden  was  scarcely  felt.  But  during 
the  last  few  decades,  with  the  complicated  demands  of  modem 
civilization,  public  expenditures,  both  local  and  national,  have 
increased  to  such  an  extent  as  to  exert  a  sensible  pressure  on  the 
population.  The  problems  of  public  revenue  have  been  pushed 
to  the  front.  The  expressions  of  discontent  with  various  phases 
of  the  financial  system  have  become  numerous  and  loud.  But 
for  the  most  part  the  discussion  has  been  superficial  and  the 
conclusions  reached  have  been  inadequate. 

The  opponents  of  the  general  property  tax  have  confined 
themselves  to  a  portrayal  of  its  practical  shortcomings.  No 
one  has  hitherto  attempted  to  give  the  deeper  reasons  why 
the  property  tax  is  unsuited  to  the  present  generation,  or  to 
discuss  the  subject  in  its  wider  relations  to  the  science  of  finance. 
It  is  proposed  in  this  chapter  to  show  that/the  property  tax 
is  by  no  means  original  to  America,  but  that  it  has  gone  through 
precisely  the  same  evolution  in  many  other  places.  It  is  further 
proposed  to  prove  that  the  property  tax  is  as  destitute  of  theoret- 
ical justification  as  it  is  defective  in  its  practical  application. 
And  it  is  proposed,  finally,  in  subsequent  chapters,  to  discuss 
the  reforms  of  our  direct  taxation— some  of  them  partly  com- 
pleted, some  projected,  and  some  hitherto  neglected. 

I.  Practical  Defects 

The  defects  of  the  general  property  tax  may  be  treated  under 
five  heads. ^ 

1  In  a  monograph  by  the  present  writer  entitled  Finance  Statistics  of  the 

19 


y 


I 


y 


20 

"  Dro 


ESSAYS  IN   TAXATION 


1.  Lack  of  uniformity,  or  inequality  of  assessments  The 
property  tax  with  us  is  an  apportioned,  not  a  percentage  tax. 
According  to  the  latter  method,  the  tax  would  be  levied  on  the 
individual  by  means  of  a  fixed  percentage  of  all  property. 
According  to  the  actual  method,  the  total  amount  to  be  raised 
by  the  state  is  first  ascertained  and  is  then  apportioned  to  the 
various  subdivisions  according  to  the  appraised  valuation  in 
each.  The  final  rate  of  taxation  throughout  a  state  is  ob- 
tained by  adding  the  local  tax  to  the  state  tax.  The  rate  of 
taxation  ought  therefore  to  vary  only  with  the  local  needs, 
and  would  indeed  so  vary  if  property  were  everywhere  assessed 
imiformly.  As  an  actual  fact,,  however,  this  is  far  from  being 
the  case.  In  most  of  the  commonwealths  the  tax  laws  provide 
for  the  assessment  of  property  at  its  ''fair  cash  value."  And  in 
all  the  states  it  is  expected  that  the  valuation  shall  everywhere 
be  made  at  a  uniform  rate.  Yet  it  is  a  notorious  fact  that  in 
scarcely  any  two  contiguous  counties  is  the  property — even  the 
real  estate — appraised  in  the  same  manner  or  at  the  same  rate. 
In  regard  to  the  manner,  it  frequently  happens  that  corporation 
property,  e.g.  the  roadbed  of  a  railway,  is  assessed  in  one  county 
I  at  an  immense  sum  per  mile  and  is  treated  in  the  adjacent 
county  like  a  piece  of  grazing  land.^  In  regard  to  the  rate, 
the  assessors  follow  the  practice  sanctioned  by  local  usage,  or 
decide  by  mere  caprice.    The  official  reports  abound  with  com- 

American  Commonwealths  (Publications  of  the  American  Statistical  Asso- 
ciation, Dec.  1889)  may  be  found  a  large  number  of  citations  from  the  com- 
monwealth financial  reports  for  the  preceding  year.  The  reader  is  referred 
to  that  publication  for  the  verification  of  statements  for  which  no  special 
authority  is  adduced  in  these  pages.  See  especially  pp.  401^17.  Many 
facts  and  figures  may  also  be  found  in  Ely,  Taxation  in  American  States 
and  CitieSy  1887.  See  also,  for  some  striking  statistics,  T.  G.  Shearman, 
Taxation  of  Personal  Property,  impracticable,  unequal  and  unjust,   1895. 

For  the  two  decades  that  have  elapsed  since  this  chapter  was  originally 
written,  facts  in  abundance  testifying  to  the  defects  of  the  general  property 
tax  will  be  found  in  most  of  the  official  state  reports  on  taxation.  See  chap. 
XX,  below.  Cf  also  the  valuable  articles  and  addresses  in  the  (thirteen) 
Proceedings  of  the  Conferences  on  Taxation  under  the  Auspices  of  The  Na- 
tional Tax  Association,  1907-1920  (Columbus,  1908.  New  York,  1921). 
See  especially  the  "Report  of  the  Committee  on  Causes  of  Failure  of 
General  Property  Tax"  in  the  Fourth  Conference,  Columbus,  1911,  pp.  299- 
310.  At  the  second  conference  the  name  was  changed  to  International 
Tax  Association,  but  at  the  fifth  conference  the  original  name  was  resumed. 

*  In  New  York,  for  example,  two  adjoining  counties  made  a  difference  of 
$24,000  per  mile  in  assessing  the  same  railroad.  Other  counties  varied 
$20,000  per  mile.    Report  of  the  State  Assessors,  1879,  p.  19. 


THE  GENERAL  PROPERTY   TAX 


21 


plaints  or  open  confessions  that  property  is  assessed  all  the 
way  from  par  to  one  twenty-fifth  of  the  actual  value.  In  one 
county  the  property  is  listed  at  its  full  worth;  in  the  next  county 
the  assessment  does  not  exceed  a  tithe  of  its  value. ^  That 
this  is  a  glaring  infraction  of  the  fundamental  rule  of  equality 
in  taxation  is  apparent.  As  between  counties  it  leads  to  under- 
valuations which  give  an  entirely  fallacious  view  of  the  public 
resources;  as  between  individuals  it  results  m  gross  injustice. 
A  tax  rate  of  a  given  amount  on  one  may  be  double,  quintuple, 
or  decuple  the  nominally  equivalent  tax  on  another.  The  first 
constitutional  injunction — that  of  uniformity  of  taxation — 
is  flagrantly  violated.  Assessors  are  compelled  openly  to  dis- 
regard their  oaths,  or  to  incur  certain  defeat  at  the  next  elec- 
tion.^  There  is  no  pretence  of  complying  with  the  law. 

An  escape  from  these  evils  has  been  sought  in  the  creation 
of  state  boards  of  equalization.  A  number  of  commonwealths  ^ 
attempted  to  correct  the  undervaluation  of  the  county  officials 
by  giving  a  state  board  power  to  alter  the  valuations  (or  in 
some  cases,  as  Nebraska,  the  rates)  in  the  hope  of  securing 
uniformity.  In  a  few  states,  like  New  York,  Ohio,  Tennessee, 
Utah  and  Wyoming,  the  power  extended  only  to  the  equaliza- 
tion of  real  estate  assessments.  In  some  cases,  the  board  might 
change  the  valuation  of  classes  of  property  separately,  and  in 
still  fewer  instances,  like  Connecticut,  Indiana,  Maine,  New 
Hampshire  and  South  Carolina,  the  assessment  of  minor  dis- 
tricts. But  in  most  cases  its  function  was  confined  to  the  equali- 
zation of  county  assessments,  while  county  boards  dealt  with  the 
assessments  of  local  districts,  and  ordinarily  also  had  power  of 
review  over  the  assessments  of  individuals.^    In  several  cases, 

^  Biennial  Report  of  the  Auditor,  1886,  p.  4.  In  Illinois  the  range  was 
from  100  to  5%.     Report  of  the  Revenue  Commission  of  Illinois,  1886,  p.  ii. 

^  Report  of  the  Assessors  of  New  York,  1886,  p.  20.  In  one  case  an  asses- 
sor asserted  that  it  would  be  necessary  to  swear  the  merchant.  The  latter 
answered:  "If  you  swear  me,  I'll  vote  against  you  next  time."  West  Vir- 
ginia Tax  Commission,  Preliminary  Report,  1884,  p.  13. 

'  State  boards  of  equalization  are  found  almost  from  the  beginning  in 
the  New  England  states,  spreading  gradually  to  the  Western  and,  after 
the  Civil  War,  to  the  Southern  states.  By  1900  they  were  found  in  over 
twenty  States,  by  1912  in  thirty  two-states,  and  by  1921,  if  we  include 
tax  commissions  with  power  of  equalization,  in  over  forty  states.  A  sketch 
of  the  history  will  be  found  in  H.  L.  Lutz,  The  State  Tax  Commission,  1918, 
pp.  19-33.  Cf. S.  T.  Howe,  "The  Central  Control  of  the  Valuation ot  Tax- 
able Subjects"  in  Readjustments  in  Taxation  published  by  the  American 
Academy  of  Political  and  Social  Science,  1915,  pp.  112-130. 


22 


ESSAYS  IN  TAXATION 


fQ 


THE  GENERAL  PROPERTY  TAX 


23 


county  assessments,  while  county  boards  deal  with  the  assess- 
ments of  local  districts,  and  ordinarily  also  have  power  of  re- 
view over  the  assessments  of  individuals.^  In  several  cases, 
while  these  may  raise,  they  may  not  reduce,  the  aggregate  as 
returned  by  the  local  assessors;  in  other  cases  their  power  ex- 
tends only  to  real  estate;  in  still  other  cases  they  may  raise  or 
lower  the  assessment  of  separate  classes  of  property  as  well. 

The  efforts  of  both  state  and  county  boards,  however,  have 
been  very  imperfectly  successful.  The  composition  of  the  boards 
is  such  as  to  render  any  comprehensive  scrutiny  of  the  county 
returns  almost  impossible.  Even  were  the  boards  to  be  ideally 
constituted,  the  local  jealousies  and  bickerings  would  still  con- 
tinue to  prevent  any  just  distribution  of  the  burdens.^  The 
officials  themselves  confess  that  such  distribution  cannot  be 
secured  under  the  present  system.^  Boards  of  equalization 
are  thus  at  best  mere  makeshifts, — clumsy  attempts  to  accom- 
plish the  impossible.  As  it  has  been  drastically  put :  ''  A  people 
cannot  prosper  whose  officers  either  work  or  tell  lies.  There 
is  not  an  assessment  roll  now  made  out  in  this  state  that  does 
not  both  tell  and  work  Ues."*  As  long  as  this  is  true,  boards 
of  equalization  are  of  little  avail. 

2.  Lack  of  universality,  or  failure  to  reach  personal  property. 
This  defect  although  the  most  flagrant,  perhaps  requires  the 

» County  boards  of  equalization  exist  in  most  of  the  states,  even  when 
state  boards  are  unknown.  Thus  in  Delaware,  Florida,  Maryland,  Missis- 
sippi; Nevada  and  Texas  there  were  in  1912  county  boards,  but  no  state 
boards.  On  the  other  hand,  in  Connecticut,  Maine,  New  Hampshire  and 
West  Virginia  there  were  state  boards  but  no  county  boards.  Finally  in 
Georgia,  Louisiana,  Massachusetts,  Vermont  and  Virginia,  there  were 
neither  state  nor  county  boards.  For  details  see  the  census  report  Taxa- 
tion and  Revenue  Systems  of  Stale  and  Local  Governments.  A  Digest  of  Con- 
stitutional and  Statutory  Provisions  relating  to  Taxation  in  the  Different 
Slates  in  1912.    Washington,  1914. 

» "The  strife  between  counties  to  reduce  assessments  has  not  ceased  and 
in  all  probability  will  not,  as  long  as  assessors  are  elected,  or  selfishness  be 
a  passion  in  the  human  breast."  Report  of  the  California  State  Board  of 
Equalization,  1885  and  1886,  p.  4. 

>  "  No  board  of  officials,  however  diligent  or  however  conversant  they 
may  be  with  the  subject,  can  make  an  equalization  which  to  themselves  will 
be  absolutely  satisfactory."  Annual  Report  of  State  Assessors  of  New  York, 
1887,  p.  ii.    From  ocean  to  ocean  the  same  complaint  is  found. 

*  M.  I.  Townsend,  in  Proceedings  and  Debates  of  the  Constitutional  Con- 
vention of  New  York,  1867-68,  iii.,  p.  1945.  Cf.  the  first  Report  of  the  {New 
York)  Commissioners  to  revise  the  Laws  for  the  Assessment  and  Collection 
of  Taxes,  1871,  p.  33. 


I 
I 


1 


I 


least  comment;  for  it  is  so  patent  that  it  has  become  a  mere 
byword  throughout  the  land.  The  escape  of  personal  property 
is  noted  almost  from  the  beginning  of  the  existence  of  the  prop- 
erty tax  in  the  American  colonies.  Thus  in  Massachusetts  Bay 
as  early  as  1651  we  find  an  interesting  account  of  the  difficulty 
experienced  in  ascertaining  certain  personalty,  followed  by  a 
resolution  to  the  effect  that 

"  To  the  end  that  all  publicke  charges  may  beaequally  borne,  and  that 
some  may  not  be  eased  and  others  burdened  and  it  being  found  by 
experience  that  visible  estates  in  land,  com,  cattle  are,  according  to 
order,  wholly  and  fully  taxed,  but  the  estates  of  marchants,  in  the  hands 
of  neibours,  straungers,  or  their  factors,  are  not  so  obvious  to  view, 
but,  uppon  search,  little  of  theire  estates  doe  appeare,  beinge  of  great 
valew,  so  that  the  law  doth  not  reach  them  by  that  rule  of  taxing 
visible  estates, — it  is  therefore  ordered.  .  .  .  that  all  marchants,  shop- 
keep.s  and  factors  shall  be  assessed  by  the  rule  of  common  estemation. 
according  to  the  will  and  doome  of  the  assessors.  .  .  .  having  regard 
to  theire  stocke  and  estate,  be  it  psented  to  view  or  not.* " 

This  was  evidently  not  of  much  use,  for  we  soon  after  find  an 
admonition  to  the  officials  to  see  "  that  so  many  estates,  though 
more  obscure  and  difficult  to  find  out,  may  bear  their  due  and 
just  pportion  with  such  estates  as  are  more  obvious  and  can- 
not be  hid."  ^ 

What  was  true  in  a  certain  measure  at  this  early  date  has 
become  still  more  true  of  recent  years.  Personal  property  no- 
where bears  its  just  proportion  of  the  burdens;  and  it  is  pre- 
cisely in  those  localities  where  its  extent  and  importance  are  1 
the  greatest  that  its  assessment  is  the  least.  The  taxation  of 
personal  property  is  in  inverse  ratio  to  its  quantity;  the  more 
it  increases,  the  less  it  pays.  The  reason  is  plain.  So  far  as 
it  is  intangible,  personal  property  escapes  the  scrutiny  of  the 
most  vigilant  assessor;  so  far  as  it  is  tangible,  it  is  purposely 
exempted  in  its  chief  form,  as  stock  in  trade,  in  our  com- 
mercial centres.  In  the  mad  race  for  wealth  it  is  considered 
dangerous  for  the  local  assessors  in  large  cities  to  list  the  mer- 
chant's capital,  with  the  possible  result  of  driving  it  away  to 
localities  more  favored  by  their  financial  officers.  It  is  scarcely 
necessary  to  give  figures  to  substantiate  these  statements;  but 

}  Records  of  the  Governor  and  Company  of  Massachusetts  in  New  England, 
edited  by  N.  B.  ShurtleflF,  Boston,  1853,  vol.  iii.,  p.  221. 
2  Ibid.,  vol.  iii.,  p.  426. 


24  i:SSAYS  IN  TAXATION 

a  few  facts,  taken  from  the  official  documents,  national,  state 
and  municipal,  may  be  of  interest. 

The  tenth  census  of  the  United  States  asserts  that  from 
1860  to  1880  the  assessed  valuation  of  real  estate  increased  from 
6,973  millions  of  dollars  to  13,036  millions,  while  that  of  per- 
sonal property  decreased  from  5,111  to  3,866  millions.  In  1890 
the  assessed  valuation  of  real  estate  had  grown  to  18,956,  while 
that  of  personal  property  was  6,516  millions.  Scarcely  more 
than  three  decades  earlier  in  California  personal  property  was 
assessed  in  1872  at  220  millions  of  dollars,  in  1880  at  174 
millions,  and  in  1887  at  164  millions, — a  net  decrease  in  fifteen 
years  of  56  millions.  Real  estate  increased  during  the  same 
period  from  417  to  791  millions.  Personal  property  paid  17.31 
per  cent,  real  estate  82.69  per  cent  of  the  taxes.  By  1893, 
although  the  assessed  value  of  real  estate  was  1,000  millions, 
that  of  personalty  was  only  173  millions.  In  Illinois  in  1882 
personal  property  paid  22.01  per  cent  of  the  taxes,  in  1894 
only  17.26  per  cent.  In  Cook  County  (including  Chicago), 
personal  property  paid  only  14  per  cent;  in  Kankakee  County, 
only  11  per  cent.  In  Iowa,  while  the  real  estate  valuation  in 
1893  increased  over  that  of  the  preceding  year  by  32  million 
dollars,  the  assessed  valuation  of  personal  property  actually 
decreased.    In  New  York  the  figures  are  as  follows: 

Real  Estate  Personal  Property 

1843 $   476,999,000  $118,602,000 

1859 1,097,564,000  307,349,000 

1871 1,599,930,000  452,607,000 

1888 3,122,588,000  346,611,000 

1893 3,626,645,000  411,413,000 

1911 9,639,001,868  482,499,193  ^ 

The  proportion  paid  by  personal  property  has  decreased 
steadily  almost  every  year,  until  according  to  the  figures  of  1910 
it  pays  but  five  per  cent  of  the  state  taxation,  as  against  ninety- 
five  falling  on  real  estate.  In  forty  years  the  valuation  of  real 
estate  has  increased  8  billions;  that  of  personalty  has  in- 
creased only  30  millions.  In  the  District  of  Columbia  the 
valuation  was  in  1878:  realty  83  millions,  personalty  17  mil- 
lions; in  1894  realty  had  increased  to  160  millions,  personalty 
had  decreased  to  11  millions.    In  New  Jersey,  in  1887,  in  one 

^  A  part  of  this  prodigious  difference  between  real  and  personal  property 
is  due  to  the  placing  of  considerable  personalty  like  bank  stock  and  mort- 
gages in  special  classes. 


THE  GENERAL  PROPERTY   TAX 


25 


V 

t 


'/ 


township  the  real  estate  was  assessed  at  $272,232,  the  personal 
property  at  $591;  in  another  the  figures  were  $2,274,900  and 
$47,150  respectively.  Perhaps  the  most  remarkable  figures  are 
found  in  the  large  cities.  In  Cincinnati  the  valuation  in  1866 
was:  realty,  $66,454,602;  personalty,  $67,218,101.  In  1892  the 
realty  had  increased  to  $144,208,810;  the  personalty  had  de- 
creased to  $44,735,670.  In  Monroe  County,  New  York,  in  which 
the  city  of  Rochester  is  situated,  the  realty  was  assessed  in  1892 
at  $132,202,478;  the  personalty  at  $8,408,803.  Finally,  in  the 
city  of  Brooklyn  in  1893  real  estate  was  assessed  at  $486,497,186, 
while  personalty  was  valued  at  $19,123,170.  Personal  property, 
in  other  words,  paid  a  little  more  than  three  per  cent  of  the  whole 
tax  on  property.  In  1895  the  proportion  fell  still  lower, — to 
one  and  twenty-three  hundredths  per  cent. 

These  striking  figures  become  ridiculous  when  it  is  remem-  ' 
bered  that  in  our  modern  civilization  the  value  of  personal 
property  far  exceeds  that  of  real  estate,  as  understood  by  the 
taxing  power.  It  is  true  that  the  legal  distinction  between 
real  and  personal  property  fluctuates  in  the  various  common- 
wealths; but  in  the  eyes  of  the  assessors  real  estate  generally 
includes  only  land  and  the  fixtures  thereto,  all  the  other  forms 
of  wealth  being  regarded  as  personal  property.  In  Massa- 
chusetts and  a  few  other  states  it  is  indeed  provided  that 
mortgages  of  real  estate  shall  be  regarded  and  taxed  as  interests 
in  real  estate.  But  even  if  mortgages  were  counted  as  real 
estate,  and  even  if  (as  is  nowhere  done)  other  certificates  of 
ownership  in  realty  were  also  counted  as  real  estate,  it  would 
still  remain  true  that  personal  property  constitutes  the  greater 
part  of  the  national  wealth.  For  personal  property  does  not 
denote  merely  movable  objects.  It  includes  money,  public  ob- 
ligations and  the  vast  mass  of  intangible  property  represented 
by  securities  of  corporations,  of  which  only  a  small  portion 
are  certificates  of  ownership  in  realty.  Above  all,  personal 
property  includes  the  entire  and  ever-increasing  annual  prod- 
ucts of  agriculture  and  industry — ^the  gigantic  mass  of  modern 
wealth  devoted  mainly  to  consumption,  but  existing  as  the 
stock  in  trade  of  individuals.  Even  in  our  western  common- 
wealths, where  the  communities  are  still  mainly  agricultural, 
it  is  an  acknowledged  fact  that  the  personalty  exceeds  the 
realty.  The  auditor  of  Washington  tells  us  that,  if  a  true  valua- 
tion could  be  reached,  it  is  ''clear  and  incontestable  that  the 
wealth  of  the  territory  in  personal  property,  for  the  purposes 


ll 


^ 


\  \ 


I;  If 

p  .ill 


26 


ESSAYS  IN  TAXATION 


of  taxation,  would  largely  predominate  over  that  of  real  es- 
tate." ^  And  if  this  is  true  of  the  far  West,  how  much  greater 
must  be  the  relative  proportion  of  personalty  in  the  busy  marts 
of  the  East.2  Yet  the  more  differentiated  the  industry  and  the 
more  predominant  the  personalty,  the  less  does  the  latter  con- 
tribute; until  in  the  foremost  state  of  the  Union  realty  pays 
more  than  nine-tenths  and  personalty  less  than  one-tenth; 
while  m  its  second  largest  city  realty  in  1893  paid  ninety-nine 
hundredths  and  personalty  only  one  hundredth  of  the  tax. 
The  later  figures  are  even  more  striking. 

The  taxation  of  personal  property,  therefore,  is  in  inverse 
ratio  to  its  quantity.  The  more  it  increases,  the  less  it  pays. 
The  general  property  tax  thus  sins  against  the  principle  of 
universality  of  taxation  even  more  than  against  the  principle 
of  uniformity.  In  the  middle  ages  whole  classes  were  exempt 
by  express  provision  of  the  law;  in  our  time  and  country  whole 
classes  are  exempt  by  the  inevitable  working  of  the  law.  It  is 
the  law  which  is  equally  at  fault  in  both  cases. 

3.  Incentive  to  dishonesty.  One  of  the  worst  features  of  the 
general  property  tax  is  that  any  attempt  to  enforce  the  taxation 
of  personalty  by  more  rigid  methods  results  in  evasion  and 
deception.  The  property  tax  necessarily  leads  to  dishonesty, 
and  this  for  two  reasons.  In  the  first  place,  under  our  system, 
whole  classes  of  personalty  are  exempt  from  state  taxation. 
The  most  familiar  examples  are  imported  merchandise  in  the 
original  package;  United  States  bonds,  notes,  checks  and  cer- 
tificates; property  in  transitu;  goods  produced  in  another  state 
sent  on  commission ;  deposits  in  savings  banks,  etc.  The  tempta- 
tion for  the  taxpayer  to  convert  his  property  temporarily  into 
these  classes  is  generally  irresistible.  Not  only  does  the  law 
hold  out  to  individuals  inducements  to  practise  fraud,  but  it 
sustains  them  in  its  commission.^     Secondly,  wherever  any  pre- 

*  Report  of  the  Territorial  Avditor  to  the  Legislative  Assembly,  1887,  p. 
94.  Cf.  Biennial  Report  of  the  Auditor  of  Iowa,  1881,  p.  8,  and  that  of  the 
Comptroller  of  Idaho,  1887-88,  p.  74,  to  the  same  efifect. 

2  Cf.  New  York  State  Assessors'  Report,  1880,  and  Comptroller's  Report, 
1889,  p.  33:  "I  am  sure  that  the  actual  value  of  the  personal  property 
legally  liable  to  taxation  exceeds  that  of  the  real  estate." 

» In  People  ex  rel.  Ryan,  88  N.  Y.  142,  the  Court  of  Appeals  held  that  the 
assessors  were  bound  by  a  transaction  which  the  court  itself  declared  to  be 
"a  device  to  escape  taxation."  In  1892,  however,  a  law  was  passed  in  New 
York  requiring  applicants  for  reduction  of  assessment  to  make  oath  that 
they  had  not  incurred  debts  for  the  purpose  of  avoiding  taxation. 


THE  GENERAL  PROPERTY  TAX 


27 


tence  is  made  of  enforcing  the  tax  on  personalty,  and  especially 
where  the  taxpayers  are  required  to  fill  out  under  oath  detailed 
blanks  covering  every  item  of  their  property,  the  inducements  to 
perjury  are  increased  so  greatly  as  to  make  its  practice  universal. 
The  honest  taxpayer  would  willingly  bear  his  fair  share  of  the 
burden;  but  even  he  cannot  concede  his  obligation  to  pay  other 
men's  taxes.  When  an  effort  is  made  to  introduce  still  more  dras- 
tic methods  by  the  employment  of  so-called  "tax-inquisitors" 
or  "tax-ferrets,"  as  until  formerly  in  Ohio  and  Iowa,  and 
recently  in  Indiana,  Kentucky  and  Oklahoma,  the  situation  be- 
comes still  worse.  The  only  result  of  more  rigid  execution  of 
the  law  is  a  more  systematic  and  widespread  system  of  decep- 
tion. Official  documents  tells  us  that  "instead  of  being  a  tax 
upon  personal  property,  it  has  in  effect  become  a  tax  upon 
ignorance  and  honesty.  That  is  to  say,  its  imposition  is  re- 
stricted to  those  who  are  not  informed  of  the  means  of  evasion, 
or,  knowing  the  means,  are  restricted  by  a  nice  sense  of  honor 
from  resorting  to  them."  ^  The  tax  commission  of  New  Hamp- 
shire declares  that  "the  mere  failure  to  enforce  the  tax  is  of  no 
importance,  in  itself  considered,  in  comparison  with  the  mischief 
wrought  in  the  corrupting  and  demoralizing  influences  of  such 
legislation."  ^  The  Illinois  commission  asserts  that  the  system 
is  "debauching  to  the  conscience  and  subversive  of  the  pub- 
lic morals — a  school  for  perjury,  promoted  by  law."  ^  The 
Connecticut  commission  maintains  that  the  resulting  "de- 
moralization of  the  public  conscience  is  an  evil  of  the  greatest 
magnitude."  ^  A  later  New  York  report  states  that  "it  puts  a 
premium  on  perjury  and  a  penalty  on  integrity."  ^  The  Ohio 
conunission  tells  us  that  "it  results  in  debauching  the  moral 
sense  and  is  a  school  of  perjury,  imposing  unjust  burdens  on  the 
man  who  is  scrupulously  honest."  ^  The  Cleveland  commission 
of  1895  says  that  "the  existing  system  is  productive  of  the 
gravest  injustice;  under  its  sanction,  grievous  wrongs  are 
inflicted  upon  those  least  able  to  bear  them;  these  laws  are 
made  the  cover  and  excuse  for  the  grossest  oppression  and 

1  Report  of  the  Commissioners  of  Taxes  and  Assessments  in  the  City  of 
New  York,  1872,  p.  9. 

2  Report  to  the  Legislature.    By  Hon.  George  Y.  Sawyer,  1876,  p.  16. 
»  Report  of  the  Revenue  Commission,  1886,  p.  8. 

*  RepoH  of  the  Special  Commismm  on  Taxation,  1887,  p.  27.     Cf.  the 
New  Jersey  Tax  Commission  RepoH,  1880,  p.  11. 
^  Report  of  Counsel  to  Revise  the  Tax  Laws  of  New  York,  1893,  p.  12. 
Report  of  the  Tax  Commission  of  Ohio,  1893,  p.  22. 


I  M 


28 


ESSAYS  m  TAXATION 


THE  GENERAL  PROPERTY   TAX 


29 


/I 


/ 


injustice;  above  all  and  beyond  all,  they  produce  in  the  com- 
munity a  widespread  demoralization;  they  induce  perjury; 
they  invite  concealment.  The  present  system  is  a  school  of 
evasion  and  dishonesty.  The  attempt  to  enforce  these  laws  is 
utterly  idle."  ^  The  West  Virginia  commission  tells  us  that 
**the  payment  of  the  tax  on  personalty  is  almost  as  voluntary 
and  is  considered  pretty  much  in  the  same  light  as  donations  to 
the  neighborhood  church  or  Sunday-school."  ^  The  New 
Jersey  commission  tells  us  that  '*it  is  now  literally  true  that 
the  only  ones  who  pay  honest  taxes  on  personal  property  are 
the  estates  of  decedents,  widows  and  orphans,  idiots  and  luna- 
tics." ^  Every  annual  report  of  the  state  comptrollers  and  as- 
sessors complains  bitterly  that  the  assessment  of  personalty  is 
^othing  but  an  incentive  to  perjury.^ 

I  4.  Regressivity.  Taxes  are  progressive  when  their  increase 
I  is  moreHian'proportional  to  the  increase  of  the  property  or  in- 
1  come  taxed,  i.e.  when  the  rate  itself  increases  with  the  increase 
^  of  the  property.  Taxes  are  regressive  when  the  rate  increases 
as  the  property  or  income  decreases.  The  general  property  tax 
in  its  practical  effects  is  often  regressive,  since  the  tax  on  per- 
sonalty is  levied  virtually  only  on  those  who  already  stand  on 
the  assessor's  book  as  liable  to  the  tax  on  realty.  Those  who 
own  no  real  estate  are  in  most  cases  not  taxed  at  all;  those  who 
possess  realty  bear  the  taxes  for  both.  The  weight  of  taxation 
really  rests  on  the  farmer,  because  in  the  rural  districts  the  as- 
sessors add  the  personalty,  which  is  generally  visible  and  tan- 
gible, to  the  realty,  and  impose  the  tax  on  both.  We  hear  a 
great  deal  about  the  decline  of  farming  land.  But  one  of  its 
chief  causes  has  been  singularly  overlooked.  It  is  the  over- 
burdening of  the  agriculturist  by  the  general  property  tax. 
What  is  practically  a  real  property  tax  in  the  remainder  of  the 
state  becomes  a  general  property  tax  in  the  rural  regions.  The 
farmer  bears  not  only  his  share,  but  also  that  of  the  other  classes 
of  society.  Thus  official  documents  tell  us  that  ''the  class  of 
property  that  escapes  taxation  most  is  the  class  of  property  that 

1  Report  of  the  Special  Committee  on  Taxation  of  the  Cleveland  Chamber 
of  Commerce,  1S95,  p.  10. 

2  Preliminary  Report  of  the  Tax  Commission,  1884,  p.  10. 

*  Report  of  the  Commission  to  investigate  the  Subject  of  Taxation  in  the 
State  of  New  Jersey.    Trenton,  1897,  p.  75. 

*  Cf.  Report  of  California  Board  of  Equalization,  1885-86,  p.  6.  For  simi- 
lar quotations  fn)m  the  reports  of  later  tax  commissions,  see  chaps,  xix,  xx 
of  the  earlier  editions  of  this  work. 


J 


i 


\ 


1 1 ' 


hi 


pays  the  largest  dividends."  ^  And  in  general  it  may  be  said, 
with  our  state  auditors,  that  'Hhe  property  of  the  small  owner, 
as  a  rule,  is  valued  by  a  far  higher  standard  than  that  of  his 
wealthy  neighbor."  ^  Or,  as  it  is  put  by  others:  '' In  every  por- 
tion of  the  state  we  find  the  most  unproductive  property,  and 
that  of  the  lowest  real  value,  assessed  at  the  highest  ratio.  The 
rule  holds  good  that  those  who  have  to  battle  hardest  with  fife 
for  subsistence,  are  compelled  to  pay  the  most  onerous  taxes 
on  the  real  value  of  their  property."  ^ 

It  is  no  wonder  that  in  their  desperation  the  small  farmers 
should  cry  out  for  the  equal  enforcement  of  the  laws  taxing 
personalty;  it  is  no  wonder  that  they  should  attempt  to  stem 
the  current  in  ignorance  of  the  impossibility  of  the  task.  They 
have  forgotten  Walpole's  saying,  that  it  is  safer  to  tax  real 
than  personal  estate,  because  ''landed  gentlemen  are  like  the 
flocks  upon  their  plains,  who  suffer  themselves  to  be  shorn  with- 
out resistance;  whereas  the  trading  part  of  the  nation  resemble 
the  boar,  who  will  not  suffer  a  bristle  to  be  pluckt  from  his 
back  without  making  the  whole  parish  to  echo  with  his  com- 
plaints." ^ 

5.  Double  taxation.  Double  taxation,  as  we  shall  see  later 
on,  is  of  various  kinds.  But  there  is  one  form  which  is  par- 
ticularly applicable  to  the  property  tax,  namely  that  of  debt 
exemption.  This  is  perhaps  the  greatest  Weakness  of  the  gen- 
eral property  tax,  and  the  one  which  has  given  rise  to  the  most 
interminable  discussion. 

On  the  one  hand  it  is  maintained  that  an  offset  should  be  made 
for  all  indebtedness,  whether  mortgage  debts  on  real  property  or 
general  liabilities  on  personalty.  Individuals  should  be  taxed 
on  what  they  own,  not  on  what  they  owe.  To  tax  both  bor- 
rower and  lender  is  double  taxation.  This  is  the  view  of  the 
Connecticut  commission,^  and  the  practice  of  most  of  the  states 
accords  with  it.  On  the  other  hand,  the  majority  of  American 
investigators  assert  that  deduction  for  indebtedness  results  prac- 
tically in  such  injustice  and  deception  as  to  be  utterly  unendur- 
able.     They  therefore  demand  that  there  shall  be  no  offset  of 

*  Biennial  Report  of  the  Aivditor  of  Iowa,  1880-81,  p.  6. 

2  Biennial  Report  of  the  Auditor  of  Kentucky,  1887,  p.  iv. 

3  Report  of  the  State  Assessors  of  New  York,  1873,  p.  9.  Cf.  West  Vir- 
ginia Tax  Commission,  Preliminary  Report,  1884,  p.  8;  Report  of  the  Comp- 
troller of  Tennessee,  1888,  p.  16. 

*  Cf.  Sinclair,  History  of  the  Puhlic  Revenue,  vol.  iii.,  appendix,  p.  79. 
^  Report  of  the  Commii^^iiou  of  1887,  p.  26. 


/ 


30 


ESSAYS  IN  TAXATION 


\ 


debts  against  property.  This  is  the  view  of  the  Massachusetts 
and  New  Jersey  commissions,  ^  and  the  practice  in  some  states 
like  Pennsylvania,  Georgia,  Kentucky,  Louisiana,  Maryland  and 
Missouri. 

Both  these  views  are  correct.  To  tax  both  lender  and  bor- 
rower for  the  same  property  is  plainly  double  taxation,  and 
therefore  unjust.  The  fallacy  of  the  contrary  opinion  consists 
in  looking  at  the  property  rather  than  at  the  owner.  What  the 
state  desires  to  reach  is  primarily  the  individual.  It  taxes  his 
property  simply  because  it  considers  this  a  test  of  his  ability  to 
pay.  But  his  ability  is  manifestly  reduced  pro  tanto  by  his  debts. 
His  true  taxable  property  therefore  consists  in  his  surplus  above 
indebtedness.  Otherwise  one  would  be  taxed  for  what  he  has, 
and  another  for  what  he  has  not.  As  it  has  been  well  put,  what 
we  want  to  tax  is  ability,  not  liability.  This  is  the  view 
accepted  by  all  European  authorities.  ^  The  only  American 
scientist  who  holds  to  the  contrary  opinion,  Amasa  Walker,  does 
so  in  a  half-hearted  way;  for  he  bases  his  view  on  arbitrary  data, 
confesses  that  much  hardship  will  ensue,  and  finally  concludes 
that  the  income-tax  principle  is  the  only  just  one.  ^  To  tax 
both  property  and  credits,  both  lender  and  borrower,  is  plainly 
incorrect  in  principle  and  inequitable  in  practice. 

On  the  other  hand,  it  is  equally  true  that  deduction  for  debts 
is  thoroughly  pernicious  in  its  operation.  It  is  the  universal 
testimony  that  no  portion  of  the  tax  laws  offers  more  tempta- 
tions to  fraud  and  perjury  than  this  system  of  offsets.  The 
creation  of  fictitious  debts  is  a  paying  investment.  In  the 
states  where  such  deductions  are  permitted,  attempts  to  obtain 
immunity  from  taxation  in  this  way  are  widespread  and  gen- 
erally successful.  And  they  are  most  successful  in  the  case  of 
property  which  already  bears  less  than  its  share  of  the  burdens. 
The  great  majority  of  officials  cry  out  against  debt-exemption  as 
an  utter  abomination.  * 

Both  methods  are  thus  unendurable.  Debt-exemption  and 
no  debt-exemption  are  equally  bad.    The  states  shift  from  one 

*  Massachusetts  Commission^  1875,  pp.  95-98;  New  Jersey  Commission, 
1880,  p.  20;  Commission  of  1891,  Preliminary  Report,  p.  10. 

'  Roscher,  Finanzrvissenschaft,  p.  336;  Wagner,  Finanztuissenschaft,  ii., 
p.  432. 

'  A.  Walker,  Science  of  Wealth  (7th  edition),  339. 

*  Report  of  the  Commissioners  of  Assessm£nt  and  Taxation  in  Oregon, 
1886,  p.  9. 


THE  GENERAL  PROPERTY  TAX 


31 


policy  to  the  other  in  equal  despair.  We  are  therefore  forced 
to  the  conclusion  that  the  whole  system  is  unsound.  The  fault 
lies  not  in  the  exemption,  but  in  the  taxation,  of  property.  The 
general  property  tax  under  either  of  these  two  methods  produces 
crying  injustice.  As  there  is  no  third  method  possible,  the  in- 
ference is  that  the  injustice  is  of  the  essence  of  the  general 
property  tax.  The  New  York  commission,  indeed,  came  to 
the  conclusion  that  mortgage  debts  should  be  deducted  from 
realty,  but  that  there  should  be  no  offset  for  debt  in  the  assess- 
ment of  personalty.!  This  would  be  a  legal  discrimination 
wholly  subversive  of  the  first  principles  of  justice.  As  a  matter 
of  fact,  just  the  contrary  principle  prevails  at  present  in  New 
York  and  Connecticut;  debts  are  there  deductible  only  from 
personalty.  There  is  no  logical  escape  from  one  of  the  two 
methods,  debt-taxation  or  debt-exemption;  and  under  either 
plan  the  general  property  tax  stands  convicted  by  the  test  of 
experience. 

Under  a  system,  indeed,  where  there  is  no  general  property 
tax,  but  simply  a  tax  on  real  estate,  the  question  of  taxing 
mortgages  assumes  a  different  aspect  and  must  be  decided  in- 
dependently. As  that  problem  is  discussed  elsewhere  in  this 
volume,^  it  may  be  omitted  here.  But  as  soon  as  we  have 
the  general  property  tax  and  exempt  mortgage  debts  on  real 
estate,  the  exemption  must  consistently  be  accorded  to  all 
debts.  And  we  are  then  immediately  confronted  by  the  di- 
lemma just  discussed. 

If  we  sum  up  all  these  inherent  defects,  it  will  be  no  ex- 
aggeration to  say  that  th^^^neraLj2i:Q5ertyjtaxjn_^^ 
States  is  a  dismal  failure.  __JNo  language  can  be  stronger  than 
that  found  in  the  reports  of  the  officials  charged  with  the  duty  ' 
of  assessing  and  collecting  the  tax.  Whole  pages  might  be 
filled  with  such  testimony  from  the  various  states.  Only  the 
following  extracts  from  the  New  York  reports  are  given,  as 
samples: 

"  A  more  unequal,  unjust  and  partial  system  for  taxation  could  not 
well  be  devised.3 

1  First  Report,  1871,  pp.  60-69,  71-79.    Cf.  the  sharp  criticism  in  the 
Massachusetts  Tax  Commissioners'  Report,  1875,  p.  96. 

2  Infra,  chap.  iv. 

'  First  Annual  Report  of  the  State  Assessors,  1860,  p.  12. 


32 


ESSAYS  IN   TAXATION 


J 


The  defects  of  our  sj^stem  are  too  glaring  and  operate  too  oppressively 
to  be  longer  tolerated.^ 

The  burdens  are  so  heavy  and  the  inequalities  so  gross,  as  almost  to 
paralyze  and  dishearten  the  people. ^ 

Tlie  absolute  inefficiency  of  the  old  rickety  statutes  passed  in  a  bygone 
generation  [is  patent  to  all].^ 

The  hope  of  obtaining  satisfactory  results  from  the  present  broken, 
shattered,  leaky  laws  is  vain.* 

The  system  is  a  farce,  sham,  humbug.* 

The  present  result  is  a  travesty  upon  our  taxing  system,  which  aims 
to  be  equal  and  just.« 

[The  general  proi>erty  tax  is]  a  reproach  to  the  state,  an  outrage 
upon  the  people,  a  disgrace  to  the  civilization  of  the  nineteenth  century, 
and  worthy  only  of  an  age  of  mental  and  moral  darkness  and  degrada- 
tion, when  the  'only  equal  rights  were  those  of  the  equal  robber.' "' 

After  such  self-criticism  nothing  more  need  be  said.     In 

\J  comparison  with  this,  the  view  of  the  European  scientists  is 

moderate,   that   "a   cruder   instrumentality   of   taxation   has 

rarely  been  devised."  *     And  yet,   notwithstanding  all  this 

criticism,  our  methods  limp  along  almost  unchanged. 

II.  History  of  the  General  Property  Tax  in  Antiquity 

In  the  previous  chapter  we  have  learned  how  direct  taxation 
begins,  and  have  seen  that  the  primitive  form  is  the  land  tax 
or  tax  on  real  estate.  We  also  noticed  the  process  by  which 
the  original  mass  of  property  is  gradually  broken  up,  and  per- 
sonal property  slowly  assumes  a  greater  importance  in  the 
wealth  of  the  community.  Let  us  study  a  little  more  in  detail 
the  subsequent  history. 

The  monarch,  or  public  opinion  as  reflected  in  the  govern- 
ment, seeks  to  conform  the  practice  of  taxation  to  this  change 
in  economic  facts.  The  property  tax  continues,  but  the  as- 
sessor tries  to  make  the  tax  equable  by  including  not  only  the 
realty,  but  also  all  these  new  forms  of  personalty,  whether 
corporeal  or  incorporeal.    The  original  land  tax  is  supplemented 

*  Comptroller's  Report,  1859. 
^Assessors'  Report,   1873,  p.  3. 
'  Assessors'  Report,  1877,  p.  5. 

*  Report  of  Commissioners  of  Taxes  and  Assessments,  1876,  p.  52. 

*  Assessors'  Report,  1879,  p.  23. 

6  Comptroller's  Report,  1889,  p.  34. 
'  Assessors'  Report,  1879,  p.  7. 

"  Leroy-Bcaulicu,  Science  des  Finances  (5™'cd.),  iii-,  p.  498:  "Rarement, 
daas  la  fiscalite  moderne,  on  a  invente  d'instrument  plus  grossier." 


I 


THE  GENERAL  PROPERTY   TAX 


33 


by  other  taxes,  or  expanded  into  a  general  property  tax.  The 
attempt  is  intelligible  and  even  laudable;  for  it  is  simply  the 
manifestation  of  the  ideas  of  equality  and  universality  of  tax- 
ation. Personal  property  must  not  escape;  ergo,  it  must  be 
included  in  the  designation  of  general  property  and  taxed 
equally  with  the  real  property. 

The  attempt  is  laudable,  but  it  is  futile.  Personalty  will 
evade  the  most  inquisitorial  assessor.  Wherever  tried,  the 
general  property  tax  again  resolves  itself  into  the  real  prop- 
erty tax.  History  shows  us  that  this  has  always  been  the  case. 
The  more  complex  the  industrial  development,  the  more  in- 
evitably does  this  process  take  place  and  the  more  surely  does 
the  general^jroperty  tax^virtually  revert  to  its  primitive  form, 
of  real  property  tax.  ~  Not  alone  liistory,  but  theory,  shows'  us 
that  this  musibe  so.  For  the  general  property  tax,  as  we  have 
seen,  originated  with  and  is  calculated  for  an  economic  system 
where  the  only  property  is  the  collective,  indivisible  property, 
where  the  landowner  and  capitalist  are  one.  There  is  one  kind 
of  property,  and  therefore  one  kind  of  property  tax.  But  as 
soon  as  property  is  split  up  into  different  parts,  as  soon  as  there 
are  various  kinds  of  property,  just  so  soon  does  the  single  prop- 
erty tax  become  antiquated  and  useless.  It  is  not  only  useless, 
but  it  is  now  absolutely  iniquitous.  For  the  attempt  to  include 
under  one  head  the  gains  flowing  from  widely  different  pur- 
suits— pursuits  whose  number  and  divergence  are  limited  only 
by  the  well-nigh  boundless  variety  of  individual  capacity — , 
this  attempt  to  reduce  the  multiform  to  the  uniform  can  end 
only  in  the  virtual  exemption  of  the  new  forms  and  a  con- 
sequent overburdening  of  the  old.  What  has  been  conceived 
in  the  spirit  of  justice  develops  into  an  embodiment  of  injus- 
tice. What  has  been  in  its  origin  an  attempt  to  attain  equality 
results  in  gross  inequality. 

Because  of  the  evident  impracticability  of  the  general  prop- 
erty tax,  governments  now  begin  to  fit  their  theories  of  tax- 
ation to  the  economic  facts.  They  abandon  the  attempt  to 
make  the  new  facts  conform  to  the  old  theories.  As  various 
forms  of  personalty  gradually  set  themselves  free  from  taxation, 
the  state  reasserts  the  principle  of  equality.  But  it  now  recog- 
nizes the  existing  facts  and  abandons  the  fiction  of  the  general 
collective  property.  As  property  splits  up  into  its  various 
elements,  new  taxes  are  laid,  one  by  one,  not  on  the  property 
but  on  the  separate  sources  of  this  new  wealth.    The  old  land 


I 


li 


34 


ESSAYS  IN  TAXATION 


tax  may  be  retained,  but  other  taxes  are  imposed  in  various 
forms.  Taxes  on  vocations,  on  professions,  on  trade,  on  com- 
merce, on  profits,  on  interest,  on  wages  and  salaries,  follow  in 
quick  succession,  until  finally  the  theories  and  practice  of  taxa- 
tion are  in  harmony  with  actual  conditions.  One  by  one  these 
various  sources  of  wealth  drop  off  from  the  antiquated  general 
property  tax  only  to  receive  a  new  life  in  these  fresh  forms.  The 
feeling  of  equity  in  the  public  consciousness  cannot  be  put  down. 
What  escapes  under  one  form  it  attempts  to  reach  under  another. 
Fiscal  theory  cannot  long  lag  behind  the  facts  of  industrial  life. 
Let  us  test  the  truth  of  these  statements  by  an  appeal  to 
history.  Let  us  trace,  in  other  words,  the  actual  development 
of  the  general  property  tax.^ 
"-V  In  antiquity  direct  taxation  was  treated  as  an  extraordinary 
source  of  revenue.  The  Athenian  direct  tax  (etVc^opa),  as  levied  / 
in  the  time  of  Solon  (Br~cr"5Si)7  was  nominally  a  classified"^ 
property  tax,  but  in  reality  a  land  tax.^  With  the  increase  of 
wealth  an  attempt  was  soon  made  to  reach  personalty;  but  its 
success  is  entirely  conjectural.  We  simply  know  that  under 
Nausmicus  (b.c.  378)  the  bases  of  taxation  were  not  only  land 
and  houses,  but  also  slaves,  cattle,  furniture  and  money.  It 
has  been  claimed,  however,  that  the  tax  had  by  that  time  be- 
come a  progressive  income  tax.^  At  all  events  there  is  no  proof 
that  the  tax  on  intangible  personal  property  as  such  was  at  all 
successful. 

1  The  only  general  attempt  thus  far  made  to  discuss  this  subject  is  that  of 
Parieu,  Histaire  des  impdls  generaux  sur  la  propriete  et  le  revenu  (1856). 
While  interesting,  it  is  inexact,  inadequate,  unclear  and  antiquated. 

>  Boeckh,  Public  Economy  of  the  Athenians,  book  iv.,  chap.  5.    J.  Beloch, 
"  Des  Volksvermogen  in  Attika,"  in  Hermes,  vol.  20  (1885),  pp.  245-6  main-     < 
tains  that  it  was  a  tax  on  produce,  and  most  probably  on  gross  produce. 
It  was  paid  in  kind  until  428-7.  For  details  see  Seligman,  Progressive  Taxa- 
tion, 2d  ed.  (1908),  pp.  11-12. 

» This  is  claimed  by  Rodbertus,  in  Hildebrand's  Jahrbucher,  viii.,  p.  453 
et  seq.  For  the  other  view  see  the  complicated  interpretation  of  Boeckh 
(p.  669  of  the  American  edition).  Beloch  contends  that  it  was  still  a  prop- 
erty tax  at  this  time,  and  that  the  taxpayers  were  put  into  associations 
or  groups  (avunoplai)  for  the  purpose  of  a  more  adequate  assessment  of 
personal  property.  See  the  article  quoted  in  the  last  note  but  one,  and  also 
'*  Das  attische  Timema,"  in  Hermes,  vol.  22  (1887),  p.  371.  Beloch's  views 
are  accepted  by  Ed.  Meyer,  Geschichte  des  AUertums,  vol.  ii.  (1893),  p.  408, 
note,  and  Kleine  Schriften  zur  Geschichtstheorie  und  zur  wirthschaftlichen 
und  pditischen  Geschichte  des  AUertums  (1910),  p.  180.  Cf.  also  P.  Guiraud, 
Etudes  economises  sur  Vantiquiti,  2d  ed.  (1905),  pp.  77-79;  and  Francotte, 
Les  finances  des  dtis  grecques  (1909),  p.  26, 


THE  GENERAL  PROPERTY  TAX 


35 


In  Rome  the  direct  tax  (tributum  civium),  which  was  some- 
times-even treated  as  a  forced  loan  to  be  repaid  out  of  the 
proceeds  of  conquest,  was  levied  only  to  meet  extraordinary 
expenses  for  which  the  proceeds  of  domains  (the  vectigalia)  did 
not  suffice.  (As  Rome  was  at  first  an  agricultural  community,  / 
the  real  "  quiritarian"  property  alone  recognized  by  law  conV/ 
sisted  solely  of  land  and  the  capital  afiixed  to  land,  like  houses/ 
slaves  and  cattle.  These  were  the  res  mand'pi}  But  the  prop- 
erty tax  was  assessed  only  on  the  land,  on  the  assumption  that 
every  acre  of  land  would  require  a  definite  quantity  of  this 
productive  capital.^  The  early  Roman  property  tax  was  there-  .^ 
fore  in  effect  a  tax  "on  realty,  analogous  to  the  early  el(T(\)opd.^  J 
With  the  development  of  trade  and  industry  in  the  later  days 
of  the  republic,  the  character  of  property  underwent  a  change. 
The  amount  of  personalty  increased.  If  the  tributum  was  to 
remain  a  general  property  tax,  it  would  be  necessary  to  assess 
also  these  new  forms  of  property.  And,  in  truth,  the  attempt 
was  made.  Not  only  farming  implements,  but  ships,  carriages, 
money,  garments,  ornaments,  etc.,  were  listed.^  But  it  must  be 
remembered  that  the  only  personalty  assessed  still  consisted  of 
visible,  tangible  objects,  although  the  censors  had  practically 
unlimited  power  to  take  up  any  property  into  the  tax-list 
(census).  There  is  no  evidence  to  prove  that  trading  capital 
proper  was  at  all  taxed.^  And  it  is  useless  to  speculate  what 
might  have  been  the  result  during  the  last  period  of  the  re- 
public; for  further  progress  in  this  direction  was  checked  by 
the  fact  that,  with  one  isolated  exception,  the  republic  levied 
no  direct  property  tax  at  all  on  the  Roman  citizens  after  167 
B.C.     Whether  the  tributum  civium  was  again  employed  during 

»  "Mancipi  res  sunt  praedia  in  Italico  solo,  tam  rustica,  qualis  est  fundus, 
quam  urbana,  qualis  domus;  item  jura  praediorum  rusticorum,  velut  via, 
iter,  actus,  aquaeductus;  item  servi  et  quadrupedes,  quae  dorso  collove  do- 
mantur,  velut  boves,  muli,  equi,  asini.  Ceterae  res  nee  mancipi  sunt." 
Ulpian,  19,  1.    Cf.  Gaius,  i.,  p.  120;  ii.,  pp.  15-17. 

2  Marquardt,  Romische  Staatsverwaltung  (2d  edition),  ii.,  p.  166. 

3  Except  that  it  was  not  a  graduated  tax,  and  was  levied  on  the  market 
value,  not  the  produce. 

*  Matthias,  Romische  Grundsteuer  und  Vectigalrecht,  1882,  p.  6.  The  lead- 
ing ideas  of  Matthias  are  translated  in  Humbert,  Essai  sur  Us  finances  chez 
Us  Romains,  ii.,  p.  328  et  seq. 

'  The  only  one  who  maintains  the  contrary  is  Walter,  Geschichte  des 
romischen  Rechts  (3d  edition),  i.,  p.  271.  But  the  passage  of  Livy  to  which 
he  refers  (vi.,  27)  does  not  bear  out  his  assertion.  Walter  stands  quite 
alone.  ^ 


\y 


36 


ESSAYS  IN   TAXATION 


the  empire  is  a  moot  question.  The  weightier  arguments  seem 
to  be  on  the  side  of  tliose  who  maintain  that  it  was  never  again 
niade  use  of  in  its  old  form.^ 

In  the  provinces  the  property  tax  was  nothing  but  a  land 
tax — either  a  tax  on  the  value  {irihuium  soli),  or  a  tithe  {decuma), 
r  a  ground  rent  {vectigal  cerium  or  stipendium) .  In  addition 
to  the  land  tax  proper  we  find  the  poll  tax  (trihutum  capitis) 
which,  in  some  of  the  older  provinces  where  the  remains  of  an 
enterprising  commercial  life  still  existed,  probably  included  a 
tax  on  classes  or  professions  or  a  nominal  general  property  tax.^ 

The  Roman  property  tax  was  therefore  virtually  a  tax  on 
land  and  the  little  productive  capital  affixed  to  land.  Person- 
Ity,  so  far  as  it  was  assessed  at  all,  consisted  of  t1ie  meagre 
tangible  objects  owned  by  an  agricultural  people.  The  Romans 
had  a  general  property  tax  because,  as  in  early  Greece,  there  was 
only  one  kind  of  property — the  collective  property  owned  by 
slave-holding  landed  proprietors. 

Under  the  empire  industrial  society  began  to  differentiate. 
Caligula  (a.d.  37-41)  took  advantage  of  this  to  levy  taxes  on 
special  classes,  above  all  on  carriers,  prostitutes  and  pimps.^ 
Trading  capital,  everywhere  the  first  element  to  separate  itself 
from  the  collective  mass  of  property,  was  reached  for  the  first 
time  by  Vespasian  (6^79)  in  the  curious  tax  on  the  private 
owners  of  city  urinals  and  closets. "*  Finally,  shortly  before 
Caracalla  (211-217)  we  find  a  general  tax  on  commercial  capital, 
known  henceforth  as  aunim  negotiatorium.    But  what  a  singular 

1  Rodbertus,  Hildebrand's  Jahrbucher,  iv.,  pp.  408-427,  and  Hewegisch, 
Romische  Finanzen,  p.  1346,  maintain  its  existence.  But  Savigny,  Ver- 
mischte  Schriften,  ii.,  pp.  151,  185;  Huschke,  Ueber  den  Census  zur  Zeit 
ChrisH,  pp.  70,  190;  Mommsen,  Romische  Geschichte,  ii.,  p.  387;  and  Mar- 
quardt,  Romische  Stantsvenvaltung,  ii.,  p.  171,  take  the  opposite  view. 
Bureau  de  la  Malle,  in  his  tlcanomie  politique  des  Romains,  does  not  touch 
this  point.  The  decisive  quotation  is  that  from  Tacitus,  Annales,  13,  51,  of 
which  Rodbertus'  interpretation  is  strained.  The  best  argument — which 
has  not  hitherto  been  advanced— seems  to  be  this:  that  if  the  trihutum 
civile  had  continued,  it  would  not  have  been  necessary  for  Diocletian  to 
introduce  into  Italy  the  trihutum  provinciale. 

2  Rodbertus,  iv.,  p.  364,  puts  it  too  strongly  when  he  says  that  it  was  only 
a  poll  tax.    See  Marquardt,  op.  cit.,  ii.,  p.  195. 

'  Suetonius,  Caligula,  40 :  "Ex gerulorum  diumis  quaestibus pars octava, 
ex  capturis  prostituarum  quantum  quaeque  uno  concubitu  mereret."  Cf. 
Dio  Cassius,  lix.,  28. 

'^  Known  as /onWini.  Suetonius,  Vespasian,  16,  2S.  C/.  for  other  author- 
ities Walter,  Rechtsgeschichte,  i.,  p.  498. 


I 


U 


.1 
I* 


THE  GENERAL  PROPERTY  TAX 


37 


commentary  it  is  on  the  progress  of  civilization  that  the  first  tax 
on  circulating  capital  should  be  on  a  rather  degrading  occupa- 
tion, and  the  first  tax  on  industry  one  on  prostitutes.^  Cara- 
calla, we  are  told,  conferred  the  privilege  of  Roman  citizenship 
upon  all  the  inhabitants  of  the  empire  in  order  to  extend  to 
them  the  now  numerous  direct  taxes,  especially  the  succession 
and  manumission  taxes.^  The  provincial  land  tax  continued; 
but  it  went  through  the  same  evolution  as  the  civic  direct  tax 
and  became  a  general  property  tax. 

The  industrial  development,  however,  had  outrun  fiscal 
theory.  It  became  more  and  more  difficult  to  reach  personalty. 
More  and  more  barbarous  methods  were  introduced;^  until, 
as  Lactantius  tells  us  in  stirring  language,  torture  was  applied 
to  the  recalcitrant  owner.  ^  Under  Diocletian  the  provincial 
land  tax  (known  henceforth  as  jugatio  or  capitatio  terrena)  was 
introduced  into  Italy.  But  at  the  time  of  the  Theodosian  code 
and  the  completion  of  the  late  fiscal  system,  we  find,  not  the 
general  property  tax,^  but  a  vast  variety  of  taxes,  indirect  and 
direct.  Chief  among  the  latter  w^ere  those  on  the  profits  of 
trades,  professions  and  artisans,^  now  consolidated  into  corpora- 
tions through  the  petrifaction  of  industrial  relations.^  But  the 
attempt  to  tax  personalty  by  means  of  a  general  property  tax 
was  abandoned  because  the  original  mass  of  property  had  dis- 
integrated. The  primitive  system  was  abolished,  and  was 
replaced  by  methods  more  or  less  analogous  to  those  employed 
in  modem  Europe. 

*  Hildebrand's  Jahrbucher,  v.,  p.  315. 

2  At  least  this  is  the  uncharitable  construction  of  the  act  by  Dio  Cassius. 

•The  municipal  decurions,  for  example,  were  made  personally  liable  for 
the  taxes  levied  on  their  municipalities.  Service  as  decurion  became  com- 
pulsory and  hereditary.  Fugitive  decurions  were  brought  back,  like  fugi- 
tive serfs  or  military  deserters. 

^  De  morle  pers.  23:  Fora  omnia  gregibus  familiarium  referta;  unusquis- 
que  cum  hbens,  cum  servis  aderat;  tormenta  ac  verbera  personabant;  fiUi 
adversus  parentes  suspendebantur;  fidelissimi  quique  servi  contra  dominos 
vexabantur,  uxores  adversus  maritos.  Si  omnia  defecerunt,  ipse  contra  se 
torquebantur,  et  quum  dolor  vicerat,  adscribebantur  quae  non  habebantur. 
ine  poll  tax  {capitatio  pleheia  or  humana)  levied  on  the  serfs  {coloni) 
was  practically  a  property  tax  because  it  was  paid  by  the  landowner. 
i^novfn  ^  chrysargyrum,  vectigal  artium,  pensio  auraria,  and  aurum 
72-78  ^vasseur,  Histoire  des  classes  ouvHeres  en  France,  i.,  pp. 

J3  Jrr  ^fT^  ^'T'''  "^*^*^  ^^"^^^^  ""^  Industry  in  the  Fourth  Cen- 
tury,   Fohtical  Science  Quarterly,  ii.  (1887),  pp.  494-513. 


38 


ESSAYS  IN  TAXATION 


i 


\ 


III.  Early  Mediceval  History  of  the  Property  Tax 
During  the  middle  ages  the  same  development  can  be  no- 
ticed I  In  the  early  period,  after  th^  disruption  of  the  Roma.n 
Sri,  there  were  no  taxes  at  allT,  The  primitive  Teutonic 
idea  forced  its  way  into  the  feudal  system,  and  the  contri- 
butions  originally  devoted  to  public  purposes  became  the  private 
possessions  of  feudal  nobles  and  over-lords.  The  pubhc  tax 
became  private  property.' 

,   In  the  early  feudal  system  land  was  practically  the  only 
/form  of  wealth,  as  it  was  the  basis  of  the  political  fabric.    In 
England  the  feudal  payments  {hidage,  scutage    carucage  and 
c    tallage)  were  assessed  on  the  l^d,  just  as  the  Saxon  shim^ 
M  and  danegeid  were  land  taxes.    These  were  at  first  levied  on 
the  gross  produce  of  the  land,  either  actual  or  as  computed  by 
the  mere  quantity  of  the  land.    With  the  Progress  of<=^Vvation 
net  produce  rather  than  gross  produce  was  made  the  test.   Kents 
became  the  only  practicable  test  of  the  value  of  land.    But 
from  the  twelfth  century  onward,  the  growth  of  industry  and 
'commerce  in  the  towns  led  to  such  an  increase  of  personalty 
or  movables  that  it  became  necessary  to  devise  some  new 
method  of  reaching  the  ability  of  the  citizens    The  only  way  out 
of  the  difficulty  in  JEngland,  as  on  the  whole  continent,  was  a 
combination  of  the  taxes  oi  lands  and  on  movables  through  the 

^Tte  mTS^town  was  the  birthplace  of  modern  taxa- 
tion. Every  inhabitant  was  compelled  to  bear  his  shar^of 
the  local  burdens,  his  proportion  of  the  scot  and  the  lot.  ^1  he 
scofc-pr  tax,  was  almost  from  the  very  outset  the  general  property 
taxiombined  with  the  subordinate  poll  tax  exactly  as  in  the 
earliest  days  of  the  New  England  colonies.  The  town,  as  such, 
V^nerally  paid  its^hare  of  the  national  burdens  m  a  lump  sum^ 
the  firmaburgi.  6ut  this  Imnp  sum  was  always  distributed 
among  the  townsmen  in  proportion  to  the  property  of  each.^ 

1  Cf  for  details  Clamageran,  Hisioire  de  I'impSt  en  France   i.,  p.  115; 
and  Vuit.^,TJlies  «ur  k  r^^  financier  de  la  France  avant  la  revdutum. 

'■'  fNtimerous  examples  may  be  found  in  Madox,  Firma  Burgi,  p.  281  et 
,eg  rrTow  untr  Edward  III.,  each  man  is  "taxandus  et  ^.dendus 
iiixta  Quantitatem  bonorum  et  catallorum  suorum  ibidem.  In  another 
own  theTa^'Set  assidcri  proportionaliter  i"f  *  ^uantaatem  Itonorum 
suorum  "  For  London,  where  each  freeman  paid  the  genera  property  tax 
r^^^m  de  Lt  sui.  or  partem  catallorum,  see  the  examples  m  Mummmta 


( 


THE  GENERAL  PROPERTY  TAX 


39 


J^n  the  continent  it  was  the  same.  In  the  German  towns  the 
taxes  were  at  first  levied  only  on  lands  and  houses. ^^Begin- 
ning in  the  twelfth  century,  however,  other  constituent  ele-  / 
ments  of  property,  both  movable  and  immovable,  were  grad-"^ 
ually  added,  until  before  long  we  find  the  general  property  tax. 
The  tempo  of  the  development  naturally  varied  in  the  different 
towns,  but  the  broad  lines  were  almost  everjrwhere  the  same. 
Thus  by  the  end  of  the  thirteenth  century  it  had  become  cus- 
tomary to  add  rent-charges  to  houses  and  land.  As  long  as 
the  re^t-charges  were  irredeemable,  they  were  taxed  as  real 
estate  ;\  but  after  they  had  become  redeemable,  they  were 
gradually  treated  as  personalty.^  For  ^n  Germany  as  in  Eng- 
land we  find  the^feudal  distinction  between  real  estate  and  per- 
sonal property  i<Liegende  and  Fahrende  Habe  or  Liegenschaften 
and  Fahrniss) , [which,  was  almost  tantamount  to  that  between 
movables  and  immovables)  {Mobilien  and  Immobilien) .  The 
other  elements  of  personalty  were  slowly  added  to  the  assess- 
ment lists.  We  find  mentioned  in  the  tax  ordinances  of  the 
period  the  following  classes  of  personal  property:  (1)  household 
furniture,  (2)  clothing,  ornaments  and  weapons,  (3)  food 
supplies  for  home  consumption,  (4)  supplies  of  wine,  straw  and 
coal  for  the  same  purpose,  (5)  horses  and  cattle,  (6)  tools  of 
various  kinds,  (7)  wares  and  commodities,  (8)  money,  (9) 
credits.  At  first  a  man's  personalty  was  taxed  only  if  the 
owner  paid  no  tax  on  his  real  estate,  but  this  alternative  method 
of  taxation  soon  disappeared.  In  almost  all  cases  the  various 
classes  of  personalty  were  assessed  at  fixed  rates  which  varied 
for  each  class,  but  before  long  they  were  all  merged  into  the 
general  property  tax— or,  as  it  was  called,  the  tax  on  property 
in  possessionibus,  agris,  domibus,  censibus  et  rebus  quibuscunque^ 

Gildhallae  Londoniensis,  Liber  Albus,  i.,  p.  592  et  seq.  For  full  details  as 
to  the  method  of  assessment  tempore  Edward  II.,  see  Liber  Custumarum, 
pp.  193  et  seq.,  568  et  seq. 

1  There  is  a  rich  Uterature  of  local  taxation  in  Germany.  Well-nigh  every 
important  town  has  had  a  monograph  devoted  to  it.  The  general  surveys 
are  the  older  work  of  Zeumer,  Die  deutschen  Stadtesteuern  insbesondere  die 
stddtischen  Reichssteu^m  im  XIL  und  XI IL  Jahrhundert,  Leipzig,  1878; 
and  the  more  recent  studies  of  M.  E.  Heidenhain,  Stadtische  Vermogen- 
steuern  im  Mittdalter,  Leipzig,  1906;  and  Bruno  Moll,  Zur  Geschichte  der 
Vermogensteuem,  Leipzig,  1911.  Each  of  the  last  two  works  contains  com- 
plete bibliographies  of  the  local  histories. 

2  See  the  full  discussion  in  Heidenhain,  op.  cit.,  pp.  62-92,  esp.  68. 
•  Zeumer,  op.  ciL,  pp.  86-89. 


I 


40 


ESSAYS  IN  TAXATION 


THE  GENERAL  PROPERTY   TAX 


41 


In  some  towns  it  was  called  simply  a  tax  of  so  much  per  posse 
or  pro  honorum  facilitate}  The  documents  often  speak  of  a  man 
being  taxable  "na  sine  vermugen,"  or  in  the  Latin  equivalent 
^^  secundum  propriam  facuUatem  et  honorum  suorum  estimalionem''" 
or  ''juxta  mam  possibilitatem  et  pro  rata  honorum  suorum^ 
Many  of  the  German  towns  by  this  time  combined  the  general 
property  tax  with  the  poll  tax,"*  and  in  the  Swiss  cantons  the 
tjj*  was  even  called  the  Hah-,  Gut-,  und  Kopfsteuer.'^ 

In  France  and  in  the  Low  Countries  the  conditions  were  the 
Wme.  The  tax  started  out  as  one  on  real  estate,  but  soon  became 
one  on  property  in  general,  the  taxpayer  being  assessed  accord- 
^^  ing  to  his  vaillant  (fortune),  or  according  to  his  hiretage  and 
catel  (realtyjmd  personalty),  the  rentes-d-me  always  being  taxable 
as  realty /^^  St.  Quention  provision  was  made  as  early  as  1195 
for  a  coltectam  super  omnes  pecunias  et  hereditates  hurgensium; 
and  at  Bapaume  only  a  few  years  later  the  tax  was  levied  ad 
palentiam  tenementonim  et  mobiliumJ 

The  only  distinction  between  England  and  the  continent  was 

I .     L^that  in  England  the  property  tax  remained  for  centuries  the 

sole  local  tax,  while  in  Franco  and  Germany  local  excises  or 

octrois  were  soon  added.    But  for  some  time  at  least  the  general 

property  tax  was  the  measure  of  the  individual's  capacity. 

The  general  state  taxes  followed  in  the  wake  of  the  munic- 
ipal taxes.VAlready  in  1166  a  property  tax  was  levied  thj-ough- 
out  almost  all  Europe  in  order  to  aid  the  crusaders^  The 
English  statute  mentions  in  detail  the  various  classes  of  tax- 
able property,  namely,  lands  and  all  movables  including  gold, 
silver,  animals,  coin,  credits,  the  produce  of  vineyards,  etc.,  and 
provides  further  that  those  who  do  not  own  as  much  as  a 

*  Christian  Meyer,  Das  Stadthuch  mn  Augsburg,  1872,  pp.  75,  313. 

» Von  Below,  "Geschichte  der direkten  Staatssteuem  in  Julich  iind  Berg," 
in  Zeitschrift  des  Bergischen  Geschichtsvereim,  vol.  26  (1890),  p.  32. 
'  Moll,  op.  cit.,  p.  37. 

*  G.  von  Schonberg,  Finamverhaltnisse  der  Stadt  Basel  im  xiv.  und  xv 
Jahrhundert,  Tubingen,  1879,  p.  134. 

'  Blumer,  Stoats-  und  Rechtsgeschichte  der  schtveizerischen  Denuxratien, 
ii.,  p.  295  et  seq. 

*  Espinas,  Ijes  finances  de  la  cmnmune  de  Douai  des  origines  an  XV 
mkcle  (1902),  p.  119  €/  seq.    This  work  is  especially  valuable  for  its  wealth 
of  detail  as  to  the  French  and  Flemish  towns. 

^  In  1200.    Espinas,  op.  cit.,  p.  119,  note, 

« Sinclair,  Hist(rry  of  the  PiMic  Revenue,  i.,  p.  88.  For  a  general  treatment 
see  Gottlob,  IH^  papsdichen  Kreuzzugssteuern  des  iJ""  Jahrhunderts. 
Heiligenstadt,  1892. 


pound  should  nevertheless  pay  a  penny  if  they  are  either 
householders  or  in  possession  of  some  office.^    A  few  decades 
later,  in  1188,  came  the  Saladin  tithe,  on  the  occasion  of  the 
third  crusade,  when  all  rents  and  movables  {redditus  et  mobilia) 
were  expressly  made  taxable.^    In  England  from  this  time  on, 
the  grants  of  rents  and  movables  (de  redditihus  et  mohilihus  or, 
as  they  were  sometimes  called,  de  redditihus  et  catallis)  became 
more  and  more  common  until  they  finally  superseded  the  older 
methods  of  securing  revenue.     The  fractional  parts  of  the  prop- 
erty granted  varied  from  a  fortieth  to  a  fourth;  but  from  1290  it 
became  customary  to  tax  the  nobility  and  the  clergy  only  two- 
thirds  as  much  as  the  commons.     In  1334  the  proportion  was  ^ 
fixed  as  the  fifteenth  and  the  tenth.    The  tax  accordmgly  came 
to  be  kno^vn  as  the  fifteenth  and  tenth  {quinzime  and  disme). 
<sgtrictly  speaking,  the  tenth  was  levied  in  the  cities,  boroughs, 
and  lands  of  ancient  demesne,  the  fifteenth  in  the  rest  of  the 
country./ Practically,  however,  the  fifteenth  was  a  tax  on  rents 
or  realty,  the  tenth  a  tax  on  movables  or  personalty>;? 

The  name  applied  to  the  English  tax— fifteenths  ancTtenths  or 
tax  on  rents  and  movables— brings  up  two  interesting  problems. 
The  one  is,  why  rents  or  produce  should  have  been  put  on  a 
plane  with  movables  or  property;  the  other  is,  why  they  should 
have  been  taxed  at  different  rates. 

As  to  the  first  point,  it  is  clear  that  under  feudal  conditions, 
where  land  was  not  regularly  bought  and  sold,  the  simplest 
method  of  ascertaining  the  taxable  ability  of  the  landowner./ 
was  through  the  rental  that  he  received  for  the  land,  a  rental 
that  was  always  in  a  certain  proportion  to  the  produce  of  the 
and.  In  the  case  of  houses  in  the  towns,  especially  where  the 
land  did  not  belong  to  the  large  landowners,  we  find  of  course 
more  numerous  examples  of  transfers  of  real  estate;  and  ac- 
cordingly the  tax  on  town  houses  was  sometimes  assessed  ac- 
cording to  property,  instead  of  rental,  vakr^^.  This  is  especially 
true  in  many  of  the  German  towns.^  In  the  case  of  rent- 
charges  again,  which  m  the  earlier  centuries  were  far  more 

dorTn^rH''''''^^  ''  ^^P7"*^,^!^  ^^"  i°  Manes  "Die  Einkommensteuer  in 
der  enghschen  Fmanzpohtik,"  m  Festgaben  fur  Wilhelm  Lexis,  1907.    It 

Veto^:::tZ\T^  T'  ^"^'^"^  '^  ^^^^^^^  ^^^  am^UmscKen 
h^t'op^c^rp^  54!"^^'''  ^^'°''  ^^g^°«burg,  Zurich,  Bern,  etc.  Cf.  Heiden- 


42 


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V 


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43 


'>  I  i 
\  1'  I 


common  on  the  continent  than  in  England,  it  is  obvious  that 
under  the  prevaiUng  conditions  their  value  could  be  found 
only  as  an  annuity.  Accordingly  the  annuity  or  yearly  rent- 
charge  was  always  included  in  the  redditus  or  returns  of  real 
estate. 

Personal  property  on  the  other  hand  had  a  capital  value. 
In  fact,  most  of  the  elements  of  personalty  yielded  no  money 
produce  at  all,  but  only  what  economists  call  a  benefit  or  psy- 
chic income.  fPersonalty,  therefore,  was  taxed  according  to 
property  value;  realty,  except  in  the  towns,  according  to  rental 
value.  >/rhus  the  mediaeval  general  property  tax  was  really  a 
combination  of  property  and  product  tax,  product  being  utilized 
when  the  capital  value  was  difficult  or  impossible  to  ascertain^) 
In  England  this  system  of  distinguishing  between  rents  and 
movables  continued  through  the  middle  ages;  on  the  continent 
and  especially  where  feudal  conditions  gave  way  before  the 
democratic  movement,  the  more  unified  property  conception 
gained  the  upper  hand. 

The  other  problem  is  that  of  the  difference  in  rates.  In 
England  the  proportion  came  to  be,  as  stated,  a  tenth  for  per- 
sonalty and  a  fifteenth  for  realty.  On  the  continent  the  dis- 
parity was  often  considerably  greater,  the  rate  on  personalty 
being  frequently  two  or  even  three  times  as  high  as  that  on 
realty.  Moreover,  when  we  remember  that  in  the  case  of  per- 
sonalty the  tax  was  assessed  on  capital  value,  whereas  in  the 
case  of  realty  it  was  assessed  only  on  the  produce  of  the  prop- 
erty, the  contrast  becomes  astonishing. 

In  England  there  is  not  much  doubt  that  the  difference  in 
the  rate  was,  in  part  at  all  events,  due  to  the  fact  that  the  peers 
were  politically  more  powerful  than  the  commons.  But  in 
many  parts  of  the  continent  we  find  the  same  practice  even 
where  the  aristocrats  were  not  in  the  saddle.  The  explanation 
must  therefore  be  of  a  more  general  nature. 

Some  authors  seek  the  explanation  in  the  alleged  fact  that 
personalty,  especially  that  part  of  it  invested  in  trade  and  com- 
merce, was  more  lucrative  than  real  estate,  and  could  therefore 
more  easily  endure  a  higher  rate.^  Apart  from  the  fact,  how- 
ever, that  trade  capital  constituted  only  a  small  part  of  the 

*  This  is  the  view  of  Hartung,  "Die  Augsburger  Vermogensteuer  im  XV. 
Jahrhundert"  and  "Die  Belastung  des  Augsburgischen  Grbsskapitals," 
in  Schmoller's  Jahrhuch,  etc.,  vol.  19  (1895);  and  of  Kolle,  Die  Vermogm- 
ateuer  der  Reichstadt  Ulm  vom  Jahre  1 709.   Stuttgart,  1898. 


i 


V 


I  I 


taxable  personalty,  the  alleged  fact  is  really  without  founda- 
tion. Other  writers  advance  a  variation  of  this  theory  by  con- 
tending that  real  estate,  especially  in  the  towns,  was  of  very 
slight  productivity.  The  towns,  they  tell  us,  were  full  of  empty 
dwellings,  the  population  was  small,  and  land  was  not  the  ) 
subject  of  speculation  as  in  modem  times.  The  towns,  we  are 
told,  even  helped  to  rebuild  houses  that  had  been  destroyed  by 
fire.^  This  view,  however,  represents  an  unwarrantable  general- 
ization from  a  single  town  or  a  single  period.  \  ^  more  defen- 
sible theory  is  that  land  was  the  basis  of  the  entire  economic 
life  in  the  middle  ages,  and  since  most  people  even  in  the  towns 
made  their  chief  living  out  of  the  land,  it  was  only  natural  that  / 
the  principal  means  of  subsistence  should  be  treated  somewhat  ' 
more  tenderly  and  that  the  surplus  over  what  the  individual 
needed  for  his  living  should  be  taxed  at  a  higher  rate.^  The 
best  explanation,  however,  is  to  be  found  in  the  fact  that  it 
was  administratively  more  difficult  to  reach  personal  property, 
both  because  some  of  it  was  more  or  less  hidden  from  the  scru- 
tiny of  the  assessor,  and  because  intentional  concealment  and 
fraud  were  far  easier.^  As  a  matter  of  fact  the  assessment  of 
chattels  was  not  strictly  enforced.  This  is  apparent  in  England, 
at  all  events,  from  the  dissatisfaction  shown  with  the  tax  of 
1275,  when  the  people  were  assessed  ad  ungueni,  i.e.  up  to  the 
full  value  of  their  movables.^  In  the  succeeding  grants  the  old 
easy  practice  was  resumed.  As  the  tax  on  lands,  however, 
could  be  levied  on  actual  rents,  it  was  not  apt  to  be  so  leniently 
assessed.  Thus  a  substantial  equality  was  probably  reached. 
Just  as  in  England  the  tallages  merged  into  the  fifteenths 
and  tenths,  so  in  France  the  feudal  charges  on  the  land  de- 
veloped into  the  general  property  tax,  which  however  still 
retained  the  old  name  taille.  The  ordinances  of  1254-56  at- 
tempted to  regulate  the  assessment,  and  provided  that  im- 

*  F.  R.  Bothe,  Die  Entwickelung  der  direkten  Bestexierung  in  der  Reich- 
stadt Frankfurt  bis  zur  Revolution,  1612-1614.    Leipzig,  1906,  p.  67. 

2  This  theory  is  vigorously  espoused  by  Heidenhain,  op.  cit.y  esp.  p.  53. 

'  This  explanation  was  first  advanced  by  the  present  writer  in  1892,  in 
an  article  in  the  Political  Science  Quarterly,  and  is  found  in  the  first  edition 
of  this  work.  It  was  independently  advanced  by  Hartung  in  1895  in  the 
essays  mentioned  above,  and  is  accepted  in  substance  by  Hartwig,  Der 
Luhecker  Schoss  bis  zur  Reformationszeit,  1903,  p.  47,  and  by  Moll,  Zur 
Geschichte  defr  Vermogensteuem,  1911,  p.  108. 

*Dowell,  History  of  Taxaium  and  Taxes  in  England  (2d  edition),  i., 
p.  68. 


44 


ESSAYS  IN  TAXATION 


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45 


If 
I 


» 


movables  should  be  charged  only  half  as  much  as  movables. 
France  thus  endeavored  to  attain  by  law  what  England  effected 
by  custom.    During  the  fourteenth  century  the  taille  came  to 
be  the  chief  direct  tax,  and  in  1439  it  was  made  a  permanent 
annual  tax.    In  Germany,  also,  the  imperial  and  state  direct 
taxes,  in  so  far  as  there  were  any,  took  the  form  of  general 
property  taxes.    The  Bede  ^  or  Landhede,  the  gemeiner  Pfennig, 
the  Landschoss,'  the  Landsteuer,'  etc.,  all  followed  the  example 
of  the  local  property  tax.    In  Scotland  the  ^'costage"  paid  to 
England  in  1424  was  a  general  property  tax.    An  act  of  that 
year  directed  that  a  book  be  prepared,  containing  the  names 
of  the  inhabitants  with  a  list  of  all  their  goods,  including  corn 
and  cattle,  as  evidences  of  their  ability  to  pay.«     By  1585  it 
had  become  customary  to  apportion  the  occasional  burdens 
known  as  stents  to  the  burghs  accordmg  to  their  ''substance 

and  common  good."  ^ 

In  the  Italian  republics  the  comjjaonwealth  was  at  tirst  sup- 
l  ported  by  the  general  property  tax.  )In  Milan,  under  the  name  y 
^ima  e  catastro  de  heni  it  is  found  as  early  as  1208,  and  after- J 
wards  was  levied  with  such  severity  that  the  assessment  book 
was  known  as  the  lihro  del  dolore}  In  Genoa  it  was  called 
colletta  ^  In  Florence  it  was  known  as  estimo  and  played  an 
important  role  in  politics.i«  And  finally  we  find  in  the 
Netherlands  from  the  earliest  times  the  general  property  tax 

1  Clamageran,  Histoire  de  Vimpdt  en  France,  I,  p.  264. 

2  At  first  a  feudal  land  payment;  cf.  HUllmann,  Deutsche  Finanzgeschichte 

des  Mittelalters,  p.  133.  ,       „  ^  ■,  j^ 

>  Lang,  Histarische  Entmckelung  der  teutschen  Steuerverfassungen  seit  der 

Karolinger.    Berlin,  1793,  p.  182.  ^^  . 

*Schmoller,   "Die  Epochen  der  preuasischen  Fmanzpoht ik,     in  Jahr- 
huch  fur  Gesetzgebung,  Verwaltung  mid  Volkmirtschaft,  i.  (1877),  pp.  35, 

42 

6  Hoffmann,  Geschichte  der  direkten  Steuem  in  Baiem  vom  Ende  des  xiiL 

Jahrhunderts,  pp.  11,17,39.  .     «    „      .      -c^a-  u      u 

•  S.  H.  Turner,  The  History  of  Local  Taxation  m  Scotlarui.    iiidmDurgh, 

1908,  p.  151. 

^ Ibid.,  p.  152.  ,    ,, ,         .    V>.    i  JM    c»    -i 

'  Carli,  Relazione  del  Censimmto  dello  Staio  di  Mdano,  m  Custodi  s  bent- 

t&ri  Classici  Italiani,  parte  modema,  xiv.,  pp.  184,  185. 

»  "Le  imposte  straordinarie  si  possono  di  qucsta  epoca  [1252J  compren- 

dere  in  una  sola,  la  colletta."    Canale,  Storia  dei  Genovesi,  i.,  p.  318  (edition 

^°  Villani  tells  us  that  it  was  levied  on  "cio  che  chiascuno  haveadi  stabile 
e  di  mobile  e  di  guadagno."  Istarie  Fiorentine  fino  at  anno  1348,  book  x., 
chap.  17  (vol.  vi.,  p.  26,  of  Milan  edition  of  1803). 


known  as  the  schot  or  the  tenth,  etc.,  on  hezittun^en   (pos- 
sessions).^ 

/  The  general  property  tax  thus  existed  throughout  all  Europe. 
(it  was  moderately  successful  because  well  suited  to  the  period. 
Although  involving  an  inquisitorial  search  into  every  article  i 
of  the  scanty  mediaeval  stock,  as  can  readily  be  seen  from  the^ 
detailed  schedules  of  assessments  still  in  existence,  the  tax  was 
levied  chiefly  on  tangible,  physical  objects  not  capable  of  easy 
concealment.  With  the  exception  of  countries  like  France, 
where  the  tax  was  emasculated  by  the  system  of  exemptions, 
it  resulted  on  the  whole,  during  this  early  period  of  society, 
in  a  tax  fairly  proportional  to  the  individual  faculty.  There 
was  a  general  property  tax  because  there  was  a  very  slight 
differentiation  of  property. 

IV.  Later  Medioeval  and  Modern  History  of  the  Property  Tax 

(   Before  long  a  change  set  in.     In  England  the  fifteenths 
and  tenths  were  changed  in  1334  from  percentage  to  apportioned 
taxes.    Every  locality  had  now  to  raise  a  definite  lump  sum, 
which,  it  was  intended,  should  remain  the  same  from  year  to 
year,  and  which  was  to  be  apportioned  in  precisely  the  same 
ratio  among  the  various  counties,  towns  and  parishes.     One    - 
fifteenth  and  tenth  therefore  meant  a  fixed  sum,  and  when 
more  was  needed,  two  or  three  fifteenths  and  tenths  were  im- 
posed.   The  old  methods  of  assessment,  however,  soon  fell  into 
disuse.    Each  town  and  county  made  its  own  arrangement  and 
treated  personal  property  with  such  leniencj'-  that  the  total 
product  of  the  tenth  and  the  fifteenth  continually  decreased. 
This  resulted  in  attempts  on  the  part  of  the  crown  to  supple- 
ment the  old  tax  by  a  new  general  property  tax,  called  the  sub- 
sidy.   The  early  efforts  met  with  failure,  but  finally,  in  1514,  the 
first  general  subsidy  was  granted,  as  a  tax  of  sixpence  in  every 
pound  of  property.     The  pound  rate  was  afterwards  fixed  at 
four  shillings  on  landsJ  and  two  shillings  eight  pence  on  goods. 
But  the  subsidy  went  through  precisely  the  same  development^ 
as  the  fifteenth  and  the  tenth.    At  first  really  a  percentage  tax,  I 
it  was  soon  practically  converted  into  an  apportioned  tax  of  \ 
a  stated  lump  sum.     No  re-assessment  of  the  districts  tookJ 
place;  each  locality  was  supposed  to  pay  the  same  sum  year 
after  j^ear.    All  increase  in  wealth  was  thus  entirely  omitted  from 

*  Engels,  De  Geschiedenis  der  Belastingen  in  Nederland,  pp.  60-65. 


\ 


/ 


46 


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47 


V 


the  lists.  Exemption  after  exemption  was  made,  and  personal 
property  was  so  loosely  assessed  that  the  total  yield  continually 
declined.  The  most  arbitrary  methods  were  employed.  Only 
the  old  "subsidy-men"  were  taxed;  allowances  were  made  in 
a  multitude  of  cases;  and  the  assessments  of  personalty  were 
so  low  and  partial  that  the  subsidy  became  a  perfect  farce. 
As  Bacon  said,  "the  Englishman  is  master  of  his  own  valua- 
tion." ^  Sir  Robert  Cecil  stated  in  1592  that  there  were  not 
over  five  men  in  London  assessed  on  their  goods  at  £200;  and 
Sir  Walter  Raleigh  wrote  in  1601  that  "the  poor  man  pays  as 
much  as  the  rich."  ^  Although  nominally  a  general  property 
tax,  the  subsidy  thus  came  to  be  levied  chiefly  on  the  land,  and 
became  an  unequal  land  tax — so  unequal  that  it  finally  dis- 
appeared in  1663. 

f  Under  the  commonwealth  an  attempt  was  made  to  revive 
the  general  property  tax,  under  the  name  of  commonwealth 
monthly  assessments,  real  estate  being  always  assessed,  as 
before,  accoi:ding  tp  its  "yearly  value,"  personalty  according 
to  its  value,/^hese  monthly  assessments  were  already  author- 
ized during  the  Revolution.  Thus  in  1644  a  "monethly  assess- 
ment" was  imposed  upon  the  counties,  cities  and  towns  men- 
tioned and  levied  upon  "the  true  yearly  values  of  lands,  rents, 
annuities,  offices  and  hereditaments  and  according  to  the  true 
value  of  goods,  chattels,  debts  and  other  estate  reall  or  per- 
sonall."  ^  The  improvement  was  so  marked  that  the  old  sub- 
sidies were  completely  abandoned  and  replaced  by  the  assess 
ments.  But  the  reform  was  short-lived  and  the  assessments  of 
personal  property  continually  diminished.  Sir  William  Petty, 
the  author  of  the  first  theoretic  work  on  taxation  printed  in 
England,  discussed  the  defects  of  these  monthly  assessments  in 
a  picturesque  passage  as  follows: 

"There  have  been,  in  our  times,  ways  of  levying  an  aliquot  part  of 
mens  estate,  as  a  fifth,  and  twentieth  of  their  estates,  real  and  personal, 
yea  of  their  offices,  faculties  and  imaginery  estates  also,  in  and  about 
which  way  may  be  so  much  fraud,  collusion,  oppression  and  trouble, 
some  purposely  getting  themselves  taxed  to  gain  more  trust:  others 
bribing  to  be  taxed  low,  and  it  being  impossible  to  check  or  examine  or 

*  And,  he  adds,  "the  least  bitten  in  purse  of  any  nation  in  Europe." 

'  Report  on  Public  Income  and  Expenditure,  1869,  ii.,  p.  415. 

'  An  Ordinance  of  the  Lords  and  Commons  assembled  in  Parliament  for  the 

raising  and  levying  of  the  Monethly  Sum  of  £120,000  towards  the  maintenance 

of  the  Scottish  army,  by  a  Monethly  Assessment,  etc.    Feb.  24,  1644.    See  esp. 

p.  8. 


trace  these  collections  by  the  print  of  any  footsteps  they  leave  (such 
as  the  hearths  of  chimneys  are)  that  I  have  not  patience  to  speak  more 
against  it:  daring  rather  conclude  without  more  ado,  in  the  words  of 
our  comick  to  be  naught,  yea,  exceeding  naught,  very  abominable, 
and  not  good."  ^ 

A  little  later,  however,  Petty  was  slightly  more  hopeful  and 
expressed  the  opinion  as  do  some  of  our  rural  legislators  to-day, 
that  "assessments  upon  personal  estates,  if  given  in  as  else- 
where upon  oath,  would  brmg  that  branch  which  of  itself  is 
most  dark  to  a  sufficient  clearness."  ^ 

After  the  Revolution  the  tax  was  levied  as  the  so-called  prop- 
erty tax.    By  its  terms  ^  it  was  assessed  on  the  persons  possessed 
of  personal  property,  real  estate,  or  public  offices  or  positions  of 
profit.    And  it  was  at  first  a  percentage  tax.    But  the  yield  de- 
creased so  enormously  that  Parliament  in  1697fixed  the  sum  a 
rate  should  produce,  i.e.  it  became  an  appor^i^d  tax  of  stated 
amount.    A  rate  of  a  shilling  in  the  pound  meant  a  tax  of  half  a 
million  pounds  for  the  country  as  a  whole,  this  sum  being  sub- 
divided in  fixed  amounts  to  the  various  localities.  The  tax  varied 
from  three  to  four  shillings  in  the  pound.    In  'the  case  of  land 
the  tax  was  assessed  on  the  rent  or  yearly  value.    In  the  case  of 
personal  property  the  tax  was  assessed  on  the  value  of  the  prop- 
erty, rental  value  of  all  kinds  of  property  being  deemed  to  be 
six  per  cent  of  their  capital  value.    In  the  case  of  "any  person 
exercismg  any  public  office  or  employment  of  profit"  where  there 
was  no  capital  value  the  tax  was  imposed  directly  on  the  salary. -* 
Moreover,  the  difficulty  of  assessing  personalty  and  the  impos- 
sibility of  reaching  intangible  property  were  now  so  apparent 
that  whereas  according  to  the  intent  of  the  law  the  chief  revenue 
was  to  come  from  personal  property,  and  only  the  residue  from 
realty,  in  practice  the  tax  became  almost  exclusively  a  land  taxX 
and  was  first  so  called  in  1697.    The  "annual  land  tax"  of 
England  was  thus  intended  to  be  a  general  property  tax  and 
for  a  long  time  contmued  to  be  so  legally.^ 

pp!  il^r^^^  ''''  ^"'"'^^  ''''^  Contributions,  by  W.  Petty,  London,  1667, 

^  Petty,  Verbum  Sapienti;  or  .  .  .  the  Method  of  raising  Taxes  in  the  most  ' 
^^^^nner,  p.  17.    (Appended  to  his  Political  A7uztomy  of  Ireland,  edition 

^  4  William  III.,  chap.  1. 

*  For  a  full  explanation  of  the  law  the  provisions  of  which  are  frequently 

misunderstood,  see  Seligman,  The  Income  Tax,  1911,  pp.  48-49    ''^'^''^''^'^ 

Adam  Smith,  Wealth  of  Nations,  book  v.,  chap.  ii. :    "By  what  is  caUed 


:  f 


48 


ESSAYS  IN  TAXATION 


THE  GENERAL  PROPERTY   TAX 


49 


1 

II 


The  complaints  as  to  the  escape  of  personal  property  were 
heard  almost  from  the  beginnhig.   Thus  in  1694  Briscoe  tells  us: 

"And  here  I  might  take  notice  how  the  monied  men  are  enrich'd  by 
the  mine  of  the  poor  and  industrious  traders,  how  gentlemen  (whose 
estates  are  in  land)  are  pressed  with  taxes,  while  the  monied  men  are 
in  a  manner  tax-free;  the  landed  man  paying  more  tax  to  their  Majes- 
ties out  of  an  estate  of  £100  per  annum  or  higher,  than  the  monied  men 
do  for  £10,000  in  money."  ' 

In  the  eighteenth  century  this  had  become  a  commonplace. 
A  popular  pamphleteer  expresses  himself  as  follows: 

"This  is  a  grievous  and  unequal  tax.  In  all  the  remote  parts  of 
this  country,  the  tax  never  was  levied  according  to  the  value  of  their 
estates  nor  ever  can  be.  .  .  Monied  men  are  another  vast  body 
who  .  .  .  contribute  little  or  nothing  to  this  tax.  Their  stock  in  trade 
can  never  be  known  and  is  always  assessed  but  a  trifle.  Money  lent  on 
mortgages  never  is  taxed  and  stock  in  the  funds  hath  the  publick  faith 
to  exempt  it  so  that  it  never  can  be  taxed.  With  all  these  advantages 
the  monied  men,  though  they  hold  the  greatest  properties  in  the  state, 
pay  no  proportion  to  the  support  of  that  government  from  whence 
they  have  equal  protection  with  those  who  are  charged  at  the  utmost."  * 

Walpole  at  about  the  same  time  stated  that  "no  man  con- 
tributes the  least  share  to  this  tax,  but  he  that  is  possessed  of  a 
landed  estate.*'  ^  Perhaps  the  most  severe  arraignment  of  the 
justice  of  the  tax  is  made,  toward  the  middle  of  the  century, 
by  a  well-known  publicist,  Decker,  from  whose  catalogue  of 
indictments  we  select  the  following: 

"Thirdly,  It  tends  to  corrupt  the  manners  of  the  people,  consequently 
to  make  them  tumultuous  and  less  governable. 

"For  being  to  pay  in  proportion  to  what  they  earn,  spend,  or  possess, 
the  just  value  whereof  is  impossible  to  be  known  but  by  themselves, 
and  to  force  them  to  a  declaration,  an  oath  is  always  imposed,  which 
makes  a  struggle  between  interest  and  conscience;  an  extreme  wise 
law,  whereby  an  honest  man  is  put  on  a  worse  footing  than  a  perjured 
knave:  he  that  forswears  himself  pays  less  than  his  due  and  saves  his 
money;  but  he  that  is  conscientious  pays  to  the  full;  which  latter  sus- 

the  land  tax,  it  was  intended  that  stock  should  be  taxed  in  the  same  propor- 
tion as  land."    (Thorold  Rogers'  edition,  ii.,  p.  553.) 

1 A  Discourse  on  the  Late  Funds  of  the  Million-Act,  etc.,  by  J.  B(riscoe), 

1694,  p.  13. 

« A  Letter  to  a  Freeholder  on  the  Late  Reduction  of  the  Land  Tax  to  one 
Shilling  on  the  Pound,  By  a  Member  of  the  House  of  Ck)mmons,  London, 
1732,  pp.  44,  48,  26. 

*  Dowell,  op.  cU.,  vol.  ii.,  p.  99. 


pecting  others  to  evade,  is  piqued  at  paying  more  than  his  neighbors, 
and  wonders  why  a  false  oath  should  not  fit  as  easy  on  him  as  on  so 
many  others;  whereby  the  most  solemn  pledge  of  truth  among  men 
becomes  frequently  violated,  is  despised,  disregarded,  and  interest 
rides  triumphant  over  conscience;  which  latter  being  to  men  as  a  dike 
to  keep  out  the  torrent  of  vice,  if  once  a  thorough  breach  is  made,  a 
deluge  of  iniquity  ensues,  whereby  all  good  principles  are  drowned;  and 
the  more  vicious  men  grow,  the  readier  they  are  to  oppose  authority."  ^ 

l^  So  unequal  and  so  insignificant  did  the  old  general  property  / 
tax  (now  universally  known  as  the  land  tax)  become  that  in 
1798  permission  was  given  to  the  landowners  to  buy  themselves 
free  of  the  tax  by  the  payment  of  a  capital  sum.    In  other  words, 
the  land  tax  became  a  redeemable  rent-charger  The  provision 
taxing  personal  property  continued  to  exist  on  the  statute  book 
until  1833,  and  the  clause  taxing  public  oflSces  and  positions 
of  profit  was  not  finally  repealed  imtil  1867.    The  year  before 
its  repeal  it  yielded  the  sum  of  £823!  ^^uch  was  the  ludicrous        J 
result  of  the  attempt  to  maintain  mediaeval  customs.     The   ^^-^ 
general  property  tax,  which  had  started  out  as  a  knd  tax,  re- 
verted in  name  as  well  as  in  fact  to  its  earliest  forin^ 

In  Scotland  the  history  was  the  same,  althou^  because  of 
J|the  later  industrial  development  of  the  country  the  old  system 
survived  almost  to  our  day.^  The  chief  direct  tax,  known  as 
the  cess,  was  originally  a  general  property  tax.  '^  In  the  middle 
ages  one  of  the  functions  of  the  Great  Chamberlain  was  to 
inquire  whether  the  public  burdens  were  fairly  "distributed  to 
rich  and  poor  according  to  their  faculties."  ^  A  fixed  proportion 
of  the  cess  was  allotted  to  each  burgh  and  it  was  then  paid^artly 
out  of  "the  common  good,"  ^  partly  out  of  real  estate^  \m\e  the 
remainder,  if  any,  was  assessed  on  the  personal  property  and 
income  of  the  taxpayers.  In  1597  an  order  declared  more  pre- 
cisely that  the  officers  are  to  "stent"  each  person  "according  ^ 

^  Matthew  Decker,  An  Essay  on  the  Causes  and  Decline  of  the  Foreign 
Trade,  Edinburgh,  1756,  pp.  19-20. 

2  Report  of  the  Commissioners  of  Inland  Revenue,  1867. 

'  Cf.  for  a  sketch  of  the  Scotch  system  the  Report  of  the  Poor  Law  Com- 
missioners on  Local  Taxation,  1843,  and  the  more  recent  work  of  Stanley  H. 
Turner,  History  of  Local  Taxation  in  Scotland.    Edinburgh,  1908. 

*  "Si  equahter  ponantur  super  divitibus  et  pauperibus  juxta  eorum 
facultates."    Turner,  op.  ciL,  p.  158. 

"The  "common  good"  included  the  pubHc  lands  for  grazing  as  well  as 
leu  duties  on  those  parts  loaned  in  perpetuity  and  river  and  loch  fishings 
and  also  gram  mills  and  occasionally  a  walk-mill  and  the  like.  Turner. 
op.  cU.,  p.  128. 


50 


ESSAYS  IN  TAXATION 


THE  GENERAL  PROPERTY  TAX 


51 


to  the  avail  and  quantity  of  his  rent,  living,  goods  and  gear  that 
he  has  within  burgh."  '  In  the  course  of  time,  however,  person- 
alty slipped  out  of  the  assessment  list.  In  Dumfries  by  the  end 
of  the  seventeenth  century  the  records  tell  us  that  "now  by  the 
decay  of  trade  the  cess  is  like  to  fall  on  the  lancfa  and  houses. 
In  Kintore  the  cess  was  "paid  of  the  land  rent." 

In  the  counties  the  cess  or  land  tax,  as  it  was  now  sometimes 
leaned,  was  converted  into  a  redeemable  rent-charge  m  1798  and 
1802,  as  in  England.    In  the  boroughs,  however,  the  old  system 
>icontinued,  each  borough  levymg  the  general  proprty  tax  in  its 
own  way,  with  suitable  variations.    In  Banff,  for  instance,  in  the    / 
nineteenth  century,  the  tax  was  levied,  one-half  on  real  estate;  ^ 
one-quarter  on  trade  and  merchandise,  accordmg  to  the  amount 
of  purchases  by  each  trader;  one-eighth  on  the  mcorporat«i 
trades;  and  one-eighth  on  the  other  inhabitants,  according  to 
the  discretion  of  the  stent-master.    In  CuUen  the  rate  was  im- 
posed on  land  and  on  trade  each  being  rated  "according  to  his 
Sderstood  abiUty  to  pay." '    So  burdensome  and  vexatious 
S^re  the  remains  of  the  property  tax  felt  to  be  that  the  Com- 
mission of  1835  recommended  the  entire  abolition  of  the  trade- 
stent,  as  it  was  called.    It  was,  however,  not  until  ;896  that  the 
whole  system  of  borough  contribution  to  the  cess  was  abohshed 
and  with  it  all  attempts  to  raise  any  part  of  the  tax  fi^m  per- 
sonal  property.'    That  was  the  end  of  the  state  generaS  prop;^ 

erty  tax  in  Scotland.  ■   -j    i-  Tl 

/in  other  countries  the  history  of  the  property  tax  is  identical 
In  France  the  taille  was  of  two  kinds;  the  taUk  reelk,  whictf 
^;^  levied  only  on  lands  in  the  pays  d'Oat;  and  the  tmlkpersm. 
„eHe,nominally  a  general  property  tax  levied  m  the  pays  d  ekctian 
which  constituted  the  greater  portion  of  France.  In  reality  the 
taUk  persmnelk  was  assessed  only  on  the  families  or  households/ 
of  the  non-nobles  [rohtriers),  and  it  became  practically  a  lanjj' 
tax  like  the  tailk  rielk;  for  the  wealthy  owners  of  personalfy 
soon  acquired  the  same  privileges  as  the  nobility.  Vauban 
tells  us  that  the  tailk  as  a  tax  on  movables  was  assessed  only  on 
the  poorest  classes."    Sully,  indeed,  endeavored  m  1660  to 

1  Turner,  op.  cit.,  p.  159. 
«/Wd.,  pp.  164,  165, 183. 

'  "El'^umi  la  taiUe  6tait  un  imp6t  territorial  qui  n'atteignait  que  les 
DroDriaairea  les  plus  pauvres  du  royaume,  et  une  taxe  mobili^re  qui  portait 
LXvement  siS  les'^lasses  les  moins  riches  de  la  sociae."  Dime  royale, 
p.  32  of  Daire's  edition. 


restore  the  principles  of  the  general  property  tax  and  to  assess 
personalty  as  well  as  realty.^  But  he  failed  ignobly;  for,  at  the 
close  of  the  seventeenth  century,  the  great  work  of  Boisguillebert 
is  full  of  bitter  complaint  and  lamentation.^  And  when  the 
attempt  was  made  in  the  eighteenth  century  to  supplement 
the  taille  by  the  dixiemes  and  vingtiemes,  like  the  tenths  or 
fifteenths  of  old  in  England,  the  new  tax  again  soon  became 
virtually  a  land  tax.^  The  development  was  inevitable,  and  it 
resulted  during  the  Revolution  in  the  total  abolition  of  the 
g^eral  property  taxes. 

I  In  Germany,  the  mediaeval  assessment  lists  to  be  filled  out 
uy  the  taxpayer  bear  a  striking  resemblaneevto  those  still  used 
in  some  of  the  American  commonwealths,  ^-^ut  there,  as  here, 
it  became  continually  more  difficult  to  reach  personal  property. 
In  Prussia  (Brandenburg)  this  was  true  already  at  an  early 
period.^  In  Bavaria  as  well  as  in  Austria  the  nobility  and  the 
richer  commercial  class  succeeded  at  the  end  of  the  sixteenth 
century  in  shoving  the  main  burdens  on  the  shoulders  of  the 
rural  population.^  And  in  the  other  German  states  the  equal 
property  tax  remained  so  only  in  name.^ 

In  the  Netherlands,  the  general  property  tax  or  two  hun- 
dreth  seemed  in  the  seventeenth  century  to  possess  some  ad- 
vantages in  English  eyes.    We  are  told  by  a  pamphleteer  that 

*  Sully  ordered  the  officials  to  assess  contributors  "d  raison  de  leurs  fac- 
ult6s,  quelque  part  qu'elles  soient,  meubles  ou  immeubles,  heritages  nobles 
ou  roturiers,  trafic  et  Industrie."  Cf.  Clamageran,  Histoire  de  I'impot,  ii., 
p.  359. 

2  "II  n'y  a  pas  le  tiers  de  la  France  qui  y  contribue,  n'y  ayant  que  les  plus 
faibles,  et  les  plus  mis6rables;  en  sorte  qu'elles  les  ruinent  absolument." 
Le  detail  de  la  France,  chap.  iii. 

'  "Dans  la  pratique,  I'^l^ment  foncier  pr^ominait  presque  exclusive- 
ment."  Stourm,  Les  finances  de  Vancien  regime  et  de  la  revolution,  i.,  p. 
240.  See  also  Necker,  De  Vadministraiion  des  finances  de  la  France,  i., 
p.  159.  It  must  be  noted,  however,  that  these  taxes  were  calculated  on  the 
basis  of  income,  rather  than  of  selUng  value.  For  details,  see  Seligman, 
The  Income  Tax,  1911,  pp.  51-53. 

*  For  a  typical  list  of  1531,  see  Bielfeld,  Geschichte  des  magdehurgischen 
Steuerwesens  von  der  Reformationszeit,  pp.  19-23. 

^  SchmoUer,  "Die  Epochen  der  preussischen  Finanzpolitik,"  in  his  Jahr- 
hitch,  i.,  pp.  42,  49.    C/.  his  "Studien  uber  die  wirthschafthche  PoUtik  Fried- 
nchs  des  Grossen,"  m  the  Jahrhuch,  viii.,  p.  38,  for  Brandenburg;  viii.,  p 
1011,  X.,  p.  330,  and  x.,  p.  350,  for  Magdeburg.    Cf.  also  F.  J.  Neumann, 
Die  personlichen  Steuern  vom  Einkommen,  1896,  p.  232. 

"  Hoffmann,  Geschichte  der  direkten  Steuern  in  Baiem,  p.  70. 

^  Wagner,  Finatizwissenschaft,  iii.  (1st  edition),  pp.  62,  77,  80. 


i 


Hi  t 


! 


52  ESSAYS  IN  TAXATION 

"The  two  hundredth  part  is  asses^d  upon  th^hoVe  bulke  of  a  mans 
«.«ance  so  that  w.«.eris  ^^trhuXtdtdt^o^^ 

^rzzs  S.C7^,  - -^r^r^tUTheif :^^^^^^ 

every  mans  private  fortunes?    omce  >«"<'  9^^  f  "f '  ^  ^f^^^  aecUnes 
or  indigence;  whence  may  be  infer  d  that  the  n^gistoteo^  ^^^ 

the  way  of  equity,  seemg  it  cannot  ^^^"*  *%^,"'diffieulty  is  pre- 
poorer,  others  for  richer  than  indeed  they  "ire.    Itas  mm       y      p 

reaU  profit  is  reaped  from  wealth  imaginery. 

Half  a  century  later,  however,  the  testimony  "J  ^^^^J^^ 
spot  shows  that  the  general  property  tax  m  Holbnd  worked 
just  as  badly  as  elsewhere.   We  hear  that: 

will  unavoidably  make  it  heavier.    * 

In  Italy  the  development  of  ^^e  property  tax  can  be^ele^^^    , 
studied  in  Florentine  history.     The  eshmo,  at  hrst  assessea  g 
Sh  comparitive  equality,  -o\b™,honeycom^^^^^^^^^ 
Thuses     Personalty  slipped  out  of  the  lists   the  rich  bankers 
Sy  escl^d,  and  t h'e'whole  load  of  taxatu^n  ^^^ 
ins  force  on  the  small  owners,  pop^h  mnv^.    Hund_reds  were 
completely  ruined  and  compelled  to  seek  refuge  m  exile.      The 
.  The  City  Alarum  or  iU  Weeke  of  ourMi^arri''0^s,  etc.,  v,hereunto  r. 
annexed  a  treatise  of  the  ^f^jf '  lf„f;M^^^^^^  „/  HoUnnd  and 


THE  GENERAL  PROPERTY  TAX 


53 


discontent  became  so  loud  that  after  threats  of  revolution 
and  disorder  the  estimo  was  finally  supplanted  in  1427  by  the 
new  tax,  catasto,  to  be  levied  on  the  personalty  of  traders  and 
bankers  as  well  as  on  realty.  Machiavelli  gives  us  an  interesting 
account  of  the  opposition  of  the  nobles,  who  were  at  the  same 
time  great  financiers.^  But  the  new  general  property  tax  went 
the  way  of  its  predecessors.  When  we  read  of  the  subterfuges 
and  evasions,  of  the  strenuous  efforts  on  the  part  of  the  state 
to  compel  the  listing  of  personalty  and  of  the  dismal  failure  of 
the  attempts,  we  seem  to  be  reading  the  present-day  reports  of 
American  commonwealth  assessors  or  comptrollers.  Their  ex- 
perience was  precisely  the  same  as  ours.  In  1431  only  fifty- 
two  persons  paid  the  tax  on  trade  capital,  although  the  amount 
of  such  capital  must  have  been  immense.  And  in  1495  the  tax 
was  made  in  name,  what  it  had  long  been  in  fact,^ — a  tax  on 
immovables  only.  Personalty,  as  such,  was  henceforth  legally 
exempt.  The  general  property  tax  had  again  become  a  land  tax. 
Throughout  Europe  the  local  property  tax  also  has  become 
a  tax  on  real  estate.  In  England  the  whole  system  of  local 
taxation  is  based  on  the  poor  rate,  according  to  the  statute  of 
1601  which  mentioned  as  liable  to  the  tax  not  only  occupiers 
of  lands,  houses,  etc.,  but  every  inhabitant,  parson  and  vicar. 
The  tax  was  a  general  property  tax  levied  according  to  the 
ability  of  the  individual,  ad  statum  et  factuUates,  as  the  courts 
put  it.  "At  first  land  was  assessed,  as  everywhere  else  at  the 
beginning,  simply  according  to  the  number  of  acres;  but  by 
the  time  of  William  III.,  rental-^alue  was  substituted  for  mere 
quantity  as  the  test  of  abilitjc^  Since  personal  property  also 
was  taxable,  this  was,  however,  simply  a  general  property  tax. 
Yet  from  an  early  period  the  rule  was  adopted  that  all  personal 
property  liable  must  be  local,  visible  and  productive  of  a  profit.^ 
Thus  intangible  personalty,  tangible  personalty  kept  in  the 
owner's  hands,  earnings  from  personal  abilities,  and  profits 
from  moneys  invested  or  lent  at  interest  in  another  parish  were 
exempt  as  being  either  unproductive,  invisible,  or  not  possessing 

vol.  17  (1871)  and  the  book  of  Canestrini  quoted  in  the  next  note  but 


one. 


History  of  Florence,  iv.,  p.  14  (vol.  i.,  p.  181  of  Detmold's  translation). 

Canestnni,  La  Scienza  e  VArte  di  Stato.     Ulmposta  suUa  Richezza 
Mobile  ed  IrnmoUle  (1867),  i.,  pp.  108,  115,  321,  etc. 

'In  1633  it  was  decided  that  "the  assessments  are  to  be  according  to  the 
visible  estates,  real  and  personal,  of  the  inhabitants."  Sir  Anthony  Earby's 
Case,  2  Bulstrode,  354. 


54 


ESSAYS  IN  TAXATION 


THE  GENERAL  PROPERTY   TAX 


55 


V— 


M 


}\ 


a  local  situs}  The  only  property  not  excluded  by  these  condi- 
tions was  stock  in  trade,  but  it  was  not  until  the  industrial  revolu- 
tion toward  the  close  of  the  eighteenth  century  that  the  matter 
became  of  importance.  Lord  Mansfield  in  1775  showed  the 
impolicy  of  such  action;^  but  although  the  liability  of  stock  in 
trade  was  hotly  disputed,  it  was  affirmed  by  Lord  Kenyon  in 
1795.^  The  results  were  doubly  disastrous  in  the  places  where 
it  was  tried:  the  early  success  of  the  experiment  led  the  justices 
of  the  peace  to  begin  that  improvident  method  of  poor  relief 
known  as  the  allowance  system ;  '*  and  the  practice  of  rating 
stock  in  trade,  which  was  confined  to  the  old  clothing  district 
in  the  south  and  west  of  England,  resulted  in  the  rapid  decline 
of  the  ancient  staple  industry  and  a  transfer  of  the  business  to 
Yorkshire,  where  personalty  was  not  assessed.^  When  the  / 
principle  was  tested  in  another  district  in  1839,  the  courts  againv/ 
upheld  the  practice.®  As  a  consequence,  a  law  was  passed  which 
exempted  personalty  from  taxation,^  but  it  was  powerless  to 
bring  the  trade  back  to  its  old  channels.  The  exempting  law 
was  enacted  for  only  a  year,  but  it  has  been  annually  renewed 

7  ever  since.^  Thus  for  the  last  half  century  the  local  property 
tax  in  England  has  been  legally  as  well  as  actually  a  tax  on  pro- 
ductive real  estate  aloneT^ 

*  Report  of  the  Poor  Law  Commissioners  on  Local  Taxation,  1843,  8vo 
edition  (1844),  p.  43  et  seq.,  and  especially  pp.  34-38.  This  contains  an 
excellent  history  of  local  taxation  in  Great  Britain.  A  more  recent  work  is 
Edwin  Cannan,  The  History  of  Local  Rates  in  England,  1896  (2d  ed.,  1912). 

2  Rex  vs.  Ringwood,  1  Cowp.  326. 

'  Rex  vs.  Mast,  1  Bott.  204.  For  a  detailed  statement  of  the  case  see 
Appendix  A  to  the  Report  of  the  Poor  Law  Commissioners  on  Local  Taxa- 
tion, 1843,  nos.  35-94.  The  existence  of  the  general  property  tax  can  still  be 
seen  in  1791.    Cf.  Rex  vs.  White,  4  T.  R.  771. 

*  By  the  Speenhamland  Act  of  1795.  See  First  Annual  Report  of  the 
Poor  Law  Commissioners,  1835,  p.  207. 

*  Report  of  the  Poor  Law  Commissioners  on  I^ocal  Taxation,  1843,  8vo  edi- 
tion, p.  38. 

*  Queen  vs.  Lumsdaine,  10  Adol.  and  Ellis,  157. 

^  3  and  4  Vict.,  chap.  89,  provided  that  it  should  not  be  lawful  "to  tax 
any  inhabitant  in  respect  of  his  ability  derived  from  profits  of  stock  in  trade 
or  any  other  property,"  except  "lands,  houses,  tithes  impropriate,  propria- 
tions  of  tithes,  coal  mines,  or  saleable  underwoods." 

*  By  the  Expiring  Laws  Continuance  Act 

'  Thorold  Rogers,  Local  Taxation,  especially  in  English  Cities  and  Towns, 
p.  16.  Cf.  also  Cannan,  op.  dt.,  passim;  Noble,  Local  Taxation,  p.  58;  Pal- 
grave,  Local  Taxation  in  Great  Britain,  p.  78;  Goschen,  Reports  and  Speeches 
on  Local  Taxation,  p.  50;  Phillips,  "Local  Taxation  in  England  and  Wales," 
in  Probyn's  Local  Government  and  Taxation  in  the  United  Kingdom,  p.  602; 


i 


Scotland  has  had  an  especially  interesting  history  because  of 
its  later  industrial  development  and  of  the  consequent  survival 
of  the  old  system  almost  to  our  own  day.^  The  local  tax  in 
Scotland,  as  m  England,  origmated  with  the  Poor  Act.  The 
earUest  law  providing  for  compulsory  in  lieu  of  voluntary  con- 
tributions was  the  Vagabound  Act  of  1574,  which  authorized 
the  elders  and  deacons  in  towns  and  the  headsmen  of  rural 
parishes  *'by  their  good  discretion  to  tax  and  stent  the  whole 
inhabitants  of  the  parish  .  .  .  according  to  the  estimation  of 
their  substance."  ^  The  "stent-roU"  was  to  be  revised  yearly 
according  to  the  ''increase  or  diminution  of  men's  goods  and 
substance."  In  1649  a  more  general  act  was  passed  empowering 
the  commissioners,  when  they  found  the  voluntary  contribu- 
tions inadequate,  to  stent  the  parishes  according  to  their  ability 
and  wealth.  In  all  these  matters  the  criterion  of  ability  was 
declared  to  be  the  ''estates  and  conditions"  or  the  "goods  and  . 
substance "  of  the  inhabitants.^  In  1663  the  important  change/ 
was  introduced  that  one  half  of  the  charge  was  to  be  assessea 
on  lands  and  only  the  other  half  on  the  inhabitants  according 
to  their  means  and  substance.  In  1692  this  was  made  a  general 
rule.^  For  a  long  time  the  tax  included  personal  estates  and 
even  the  income  of  professional  classes  and  artisans.^  In  the 
various  boroughs  and  parishes  the  practice  was  exceedingly 
diversified,  although  personal  property  in  most  cases  slipped  out 
of  the  assessment.  The  Act  of  1845  granted  wide  option  to 
the  parochial  boards.  Several  alterations  were  permitted, 
one  of  which  included  an  assessment  "upon  the  whole  inhabit- 
ants according  to  their  means  and  substance."  ^  By  1847  out 
of  558  parishes  that  used  their  ratmg  powers  only  71  employed 
the  method  of  means  and  substance,  the  great  mass  imposing 

Bilinski,  Die  Gemeindebesteuerung  und  deren  Reform,  p.  35  et  seq.  See  also 
Hedley,  Observations  on  the  Incidence  of  Local  Taxation  (1884),  who  opposes 
the  exemption  of  stock  in  trade  and  the  attempts  to  get  machinery  exempted 
from  ratabiUty.  Cf.  G.  H.  Blunden,  Local  Taxation  and  Finance,  1895. 
Some  interesting  material  may  also  be  found  in  J.  J.  O'Meara,  Municipal 
Taxation  at  Home  and  Abroad,  1894. 

William  Kennedy,  English  Taxation,  1640-1799,  London,  1913,  pp.  20, 
47,  thinks  that  I  have  not  allowed  sufficiently  for  the  income  idea  in  the 
mediaeval  property  taxes.  But  see  Bruno  Moll,  Zur  Geschichte  der  englischen 
and  anterikanischen  Vermogensteuern,  1912,  esp.  pp.  17-35  where  my  con- 
clusions are  confirmed. 

^  Cf.  especially  the  work  of  Turner,  cited  supra,  p.  49,  note  3. 

nbid.,  p.  14.  3  75^  *rbid.,  pp.  21,  34. 

^Ihid.,  p.  38.  ^Ibid.,  pp.  44r^5. 


56 


ESSAYS  IN   TAXATION 


THE  GENERAL  PROPERTY  TAX 


57 


i 


tihe  tax  on  real  estate,  one-half  on  owners  and  one-half  on 
\^ccupiers.  By  1860  out  of  752  parishes  only  25  used  the  "means 
and  substance"  method.  In  1861  the  Baxter  Act  abolished 
rating  on  means  and  substance  in  all  parishes  where  it  had  been 
introduced  since  1845.  A  very  few  parishes  retained  the  sys- 
tem by  right  of  usage  previous  to  1845,  the  last  to  maintain 
the  custom  being  Greenock,  where  it  continued  to  exist  accord- 
ing to  a  curiously  progressive  scale,  until  1880.^  The  system 
was  abolished  because  it  was  finally  realized  by  the  owners 
of  real  estate  that  the  exemption  of  personalty  really  increased, 
rather  than  diminished,  the  value  of  their  own  real  property.^ 
Thus  came  to  an  end  the  local  general  property  tax  in  Scotland. 
As  we  have  seen  above,^  it  was  only  a  few  years  more  before 
the  state  general  property  tax  followed  suit. 

History  thus  everywhere  teaches  the  same  lesson.  As  soon 
as  the  idea  of  direct  taxation  has  forced  itself  into  recognitio 
it  assumes  the  practical  shape  of  the  land  tax.  This  soon  de- 
Arelops  into  the  general  property  tax  which  long  remains  the 
\Jmdex  of  ability  to  pay.  But  as  soon  as  the  mass  of  property 
splits  up,  the  property  tax  becomes  an  anachronism.  The 
various  kinds  of  personalty  escape,  until  finally  the  general 
property  tax  completes  the  cycle  of  its  development  and  re- 
verts to  its  original  form  of  the  real  property  tax.  The  property 
tax  in  the  United  States  is  simply  one  instance  of  this  universal 
r  /tendency;  it  is  not  an  American  invention,  but  a  relic  of  mediae- 
^valism.  In  substance,  although  not  in  name,  it  has  gone  through 
every  phase  of  the  development,  and  any  attempt  to  escape 
the  shocking  evils  of  the  present  by  making  it  a  general  prop- 
erty tax  in  fact  as  well  as  in  name  is  foredoomed  to  failure. 
The  general  property  tax  as  the  chief  source  of  revenue  is  im- 
ppssible  in  any  complicated  social  organism.  Mediaeval  methods 
Cannot  succeed  amid  modern  facts 

V.  Theory  of  the  General  Property  Tax 

While  it  is  generally  confessed  that  the  property  tax,  as 
administered  in  the  United  States,  is  a  failure,  it  is  sometimes 
contended  that  if  thoroughly  executed  it  would  be  a  just  tax.  '* 

1  Ibid.,  pp.  48-49.  2  Ibid.,  p.  52.  » Supra,  p.  50. 

*  "  While  there  is  no  fairer  or  better  mode  of  taxation  than  the  ad  valorem 
system  properly  and  justly  administered,  there  is  none  more  oppressive  or 
unjust  and  unequal  when  loosely  or  imperfectly  executed."  Report  of  the 
Comptroller-General  of  Georgia,  1894,  p.  5. 


)n  I 


The  theory  of  the  general  property  tax  designed  as  the  sole  or 
principal  source  of  state  and  local  revenue,  as  set  forth  in  almost 
all  our  state  constitutions,  is  held  to  be  correct  in  principle. 
Is  this  true? 

In  the  first  place  we  must  disabuse  ourselves  of  the  idea 
that  property,  as  such,  owes  any  duty  to  pay  taxes.  The  state 
has  direct  relations  not  with  property,  but  with  persons.  It 
is  the  individual  who,  from  the  very  fact  of  his  existence  within 
the  state,  is  under  definite  obligations  toward  the  state,  of 
which  the  very  first  is  to  protect  and  support  it.  The  state, 
indeed,  can  exist  without  the  particular  individual,  but  the 
individual  cannot  exist  without  the  state.  Every  civilized 
community  professes  to  tax  the  individual  according  to  his 
ability  to  pay,  which  may,  indeed,  be  measured  by  his  prop- 
erty or  by  any  other  standard.  In  the  last  instance,  however, 
it  is  the  individual  who  really  owes  this  duty. 

But  is  property  the  true  test  of  ability?  In  primitive  com- 
munities it  is  to  a  certain  extent.  Every  freeman  is  a  proprietor, 
and  all  are  supported  by  the  produce  of  the  land.  Comparative 
equality  of  wealth  gives  comparative  equality  of  opportunity, 
and  the  finer  differences  in  ability  to  pay  are  not  yet  recognized. 
In  the  early  stages  of  society  property  is  indeed  a  rough  test 
of  ability. 

But  a  change  soon  sets  in.  As  society  differentiates,  classes 
arise  who  support  themselves  not  from  their  property,  but  from 
their  earnings.  Manifestly  he  who  earns  a  salary  cannot  be 
declared  entirely  devoid  of  ability  to  pay,  as  compared  with  one 
who  receives  the  same  amount  as  interest  on  a  principal,  or  as 
profits  on  property.  Moreover,  the  productiveness  of  property 
becomes  a  controlling  element  in  calculating  the  owner's  ability. 
Of  two  factory  owners,  one  may  be  running  full  time  and  making 
large  profits;  the  other  may  be  compelled  to  keep  his  factory 
closed,  earning  nothing.  Of  two  landowners,  one  may  employ  im- 
proved processes  and  enjoy  a  large  product;  the  other,  although 
on  equally  valuable  land,  may  suffer  climatic  reverses  and 
produce  far  less.  Of  two  capitalists,  one  may  invest  his  property 
so  as  to  obtain  large  proceeds;  the  other"^  may  put  an  equal 
amount  into  an  enterprise  which  yields  very  little.  It  is  plainly 
mcorrect  to  say  that  the  ability  in  these  cases  varies  with  the 
property.  The  test  of  ability  is  shifted  from  property  to 
product,  proceeds  or  earnings. 

The  truth  of  this  principle  is  faintly  recognized  in  the  legis- 


ll 


1 


58 


ESSAYS  IN   TAXATION 


THE  GENERAL  PROPERTY  TAX 


59 


V 


I 


1 


I      I 


lation  of  all  countries  one  step  removed  from  the  primitive  tax 
system.    Its  application  can  be  seen  in  some  of  the  mediaeval 
town  taxes,  where  the  earnings  of  the  artisans  and  tradesmen 
were  taxable,  as  evidences  of  ability  or  faculty,  side  by  side  with 
the  property  of  others.    It  can  be  seen  also  m  various  attempts 
of  mediaeval  states  to  tax  the  proceeds  or  rents  of  land,  the 
salaries  of  officials  and  the  products  of  individual  exertion.    In 
like  manner,  it  can  be  seen  in  the  early  legislation  of  the  Ameri- 
can colonies.    Thus  the  law  tax  of  1634  in  Massachusetts  Bay 
provided  for  the  assessment  of  each  man  ''according  to  his 
estate  and  with  consideration  of  all  other  his  abilityes  what- 
soever.''   The  measure  of  ability,  however,  was  still  property, 
as  appears  from  the  provision  of  1635  that  "all  men  shall  be 
rated  for  their  whole  abilitie,  wheresoever  it  lies.''    By  1646,  the 
glimmering  of  the  new  idea  is  seen;   for  the  law  now  provides 
not  only  for  rating  of  all  ''estates,  both  real  and  personal,"  but 
also  for  the  taxation  of  "manual  persons  and  artists,"  who 
"are  to  be  rated  for  returns  and  gains  proportionable  unto  other 
men  for  the  produce  of  their  estates."    In  other  words,  not  only 
property  but  product  was  taken  into  account.    In  many  of  the 
other  American  colonies,  also,  the  profits  of  certain  classes  were 
taxable  like  the  produce  of  estates,  by  what  was  known  as  the 
faculty  tax  or  the  assessment  on  the  faculty.^     We  see,  there- 
fore, how  wide  of  the  mark  is  the  statement  that  the  system 
which  the  Americans  instinctively  adopted  was   "the  equal 
taxation  of  property,  the  non-taxation  of  labor." 

In  the  colonies,  indeed,  these  laws  mark  only  the  first  famt 
attempts  to  substitute  product  for  property  as  the  basis  of 
taxation.  Later  on,  the  distinction  was  lost  sight  of  and  the 
attempt  abandoned.  But  in  Europe  the  development  con- 
tinued and  the  basis  of  the  tax  system  was  changed  from  prop- 
erty to  product.  Thus  taxes  on  land,  houses,  wages,  salaries, 
interest,  profits,  etc.,  gradually  supplanted  the  property  tax,  and 
formed  a  more  or  less  complete  system  based  on  product.  In 
modem  societies,  as  we  have  seen,  the  basis  of  taxation  has 
very  recently  again  shifted  from  product  to  income.  The 
point  here  to  be  noticed  is  that  throughout  all  Europe  the 
mediaeval  basis  of  taxation— the  mass  of  property— was  aban- 
doned because  it  no  longer  corresponded  to  the  demands  of  jus- 
tice.   The  property  tax  is  theoretically  unjust  because  property 

t  For  the  details  of  this  development  seeSeligman,  The  Income  Tax,  1911, 
367  et  8eq. 


no  longer  measures  the  ability  to  pay — because  property  has 
been  replaced  by  product  as  an  index  to  faculty. 

This  is  the  reason  for  the  failure  of  the  property  tax.  It 
has,  indeed,  been  contended  by  some,  as,  for  instance,  by  Presi- 
dent Walker,  that  the  fatal  defect  of  the  property  tax  consists 
in  its  constituting  a  penalty  on  savings.^  This  criticism  seems 
to  be  questionable,  for  the  same  objection  would  attach  to  any 
tax  based  on  income  just  so  far  as  income  exceeds  expendi- 
tures. An  income  tax  on  the  surplus  is  equally  a  tax  on  sav- 
ings. There  is  no  difference  in  this  respect  between  a  property 
tax  and  this  portion  of  an  income  tax.  The  only  logical  con- 
clusion from  this  objection  to  the  property  tax  is  a  tax  on  ex- 
pense. If  we  wish  to  avoid  taxing  savings,  we  must  tax  only 
expenditure.  And  yet  President  Walker  correctly  opposes  the 
expense  tax  as  the  most  unjust  of  all.  The  property  tax  is  un- 
just, not  because  it  is  a  penalty  on  savings,  but  because  prop- 
erty is  no  longer  a  measure  of  ability. 

There  is  not  a  single  scientist  of  note  who  upholds  the  prop- 
erty tax  as  the  sole  or  chief  direct  contribution.  Some  of  the 
German  writers  on  finance  do,  indeed,  advocate  a  general  prop- 
erty tax,  but  simply  as  a  subordinate  supplement  to  all  existing 
direct  taxes,^  and  mainly  as  an  adjunct  to  the  income  tax,  in 
order  to  tax  income  from  property  more  than  professional  or 
individual  earnings.  These  writers,  however,  overlook  the 
fact  that  the  same  result  may  be  attained  by  making  a  differ- 
ence in  the  rate  of  the  income  tax,  as  in  Italy.  The  post-bellum 
examples  of  the  taxation  of  property  in  the  shape  of  a  capital 
lev}^  as  in  Germany  and  Italy  in  1920  not  only  constitute  supple- 
mentary sources  of  revenue  but  are  obviously  emergency  meas- 
ures and  not  subject  to  repetition. 

One  other  argument  of  somewhat  more  weight  is  sometimes 
advanced  in  favor  of  the  property  tax,  viz.,  that  under  any 
other  system  unproductive  property,  like  jewellery,  art  collec- 
tions, unimproved  lands,  etc.,  would  be  exempt.  This  con- 
sideration at  its  best  does  not  justify  a  general  property  tax, 
but  a  tax  on  special  kinds  of  property.  Entirely  apart  from 
the  impolicy  of  taxing  art  collections,  or  the  impossibiUty  of 

*  Political  Science  Quarterly,  vol.  iii.  (1888),  p.  3. 

^Cf.  Gustav  Cohn,  Finanzivissenschnft,  §475:  "Neben  der  Erwerbsbe- 
steuerung  bleibt  f  Ur  die  Besitzbesteuerung  heute  nur  ein  beschrankter  Kaum 
Ubrig."  See  the  English  translation,  p.  566:  ''The  taxation  of  earnings  as 
it  exists  to-day  leaves  but  scant  room  for  taxes  on  possessions." 


II 


60 


ESSAYS  IN   TAXATION 


THE  GENERAL  PROPERTY   TAX 


61 


1 

,1 

1 1  I 

I 


i 


discovering  jewellery,  or  the  utter  insignificance  of  this  kind  of 
property  when  compared  with  the  total  national  wealth,  the 
argument  is  defective.    The  conversion  of  capital  into  unpro- 
ductive wealth  of  itself  destroys  the  revenue,  which  is  the  only 
true  fund  for  the  payment  of  taxes.    It  is  undeniable  that  if 
the  property  were  productive,  and  if  the  tax  were  levied  on  the 
product,  the  owner  would  pay  a  larger  sum.    But  on  the  other 
hand,  his  revenue  would  be  still  greater  and  his  annual  sur- 
plus above  the  tax  would  constitute  an  ever-increasing  pro- 
ductive fund.    To  leave  unproductive  property  free  may  thus 
indeed  lessen  the  share  of  the  government,  but  seems  to  be 
nothing  more  than  justice  to  the  individual.    His  renunciation 
of  revenue  diminishes  pro  tanio  his  tax-paying  ability.     It  is 
really  only  because  of  the  belief  that  the  possession  of  these 
articles  of  consumption  involves  an  expenditure  for  their  main- 
tenance, or  forms  an  indirect  proof  that  their  owner  is  able  not 
only  to  retain  these  articles  of  luxury,  but  also  to  live  in  com- 
fort on  his  income,  that  we  attempt  to  tax  this  kind  of  property. 
In  other  words,  just  as  relative  expenditures  of  certain  kinds 
afford  a  rough  criterion  of  a  man's  income,  because  his  stand- 
ard of  living  usually  bears  a  fairly  definite  relation  to  his  income, 
so  the  taxation  of  special  articles  of  property  may  really  be  con- 
sidered an  indirect  way  of  getting  at  relative  revenue.     But 
precisely  because  it  is  very  rough  and  indirect,  it  is  in  the  mam 
unsatisfactory. 

The  great  element  of  reason  in  the  demand  for  the  taxation 
of  unproductive  property  is  to  be  found  in  the  assessment  of 
real  estate.  It  is  an  undoubted  fact  that  real  estate  is  often 
held  for  speculative  purposes,  and  that  it  is  the  duty  of  the 
community  not  to  encourage  such  speculation  by  exempting 
vacant  lands  from  taxation.  The  owner  expects  to  reap  from 
the  future  value  of  the  land,  whether  he  sells  or  keeps  it,  a  sum 
more  than  sufficient  to  recompense  him  for  his  outlay  and  inter- 
vening loss  of  interest  and  profit.  He  is  prospectively  earning 
an  annual  revenue  from  the  land,  whose  present  unproductive- 
ness is  technical  rather  than  real.  It  is  thus  perfectly  logical 
to  tax  unproductive  real  estate  even  though  the  basis  of  taxa- 
tion be  product  rather  than  property.  It  is  the  estimated, 
rather  than  the  actual,  product  that  is  taxed. 

But  even  granting  that  there  is  this  justification  for  a  tax  on 
certain  forms  of  unproductive  property,  it  would  not  strengthen 
the  case  for  a  general  property  tax.    At  best  it  would  simply 


mean  that  the  tax  on  product  should  be  supplemented  by 
a  tax  on  certain  kinds  of  unproductive  property,  which  are 
really  prospectively  productive.  No  one  has  ever  objected  to  a 
real  estate  tax,  whether  it  be  levied  on  the  basis  of  value  or  of 
assumed  product.  But  a  real  estate  tax  is  not  a  general  property 
tax;  the  principle  of  the  real  estate  tax  does  not  signify  that 
property  in  general  should  be  made  the  test  of  ability  to  pay. 
We  may,  therefore,  still  assert  that  if  there  are  any  evils  arising 
from  the  absence  of  a  general  property  tax,  they  are  slight  when 
compared  to  the  evils  inseparable  from  its  existence. 

VI.  Conclusion 

From  the  preceding  survey  it  is  difficult  to  escape  the  con- 
clusion that  the  general  property  tax  as  the  main  source  of 
public  revenue  is  a  failure  from  the  triple  standpoint  of  history, 
theory  and  practice. 

Historically,  the  property  tax  was  once  well-nigh  universal. 
Far  from  being  an  original  idea  which  the  Americans  instinc- 
tively adopted,  it  is  found  in  all  early  societies  whose  economic 
conditions  were  similar  to  those  of  the  American  colonies.  It 
was  the  first  crude  attempt  to  attain  a  semblance  of  equity, 
and  it  at  first  responded  roughly  to  the  demands  of  democratic 
justice.  In  a  community  mainly  agricultural,  the  property  tax  \ 
was  not  unsuited  to  the  social  conditions.  But  as  soon  as  com-  i 
mercial  and  industrial  considerations  came  to  the  foreground 
in  national  or  municipal  life,  the  property  tax  decayed,  became 
a  shadow  of  its  former  self  and,  while  professing  to  be  a  tax  on 
all  property,  ultimately  turned  into  a  tax  on  real  property. 
The  disparity  between  facts  and  appearances,  between  prac- 
tice and  theory,  almost  everywhere  became  so  evident  and 
engendered  such  misery,  that  the  property  tax  was  gradually 
relegated  to  a  subordinate  position  in  the  fiscal  system,  and  was 
at  last  completely  abolished.  All  attempts  to  stem  the  current 
and  to  prolong  the  tax  by  a  more  stringent  administration  had 
no  effect  but  that  of  injurious  reaction  on  the  morale  of  the  com- 
munity. America  is  to-day  the  only  great  nation  deaf  to  the 
warnings  of  history.  But  it  is  fast  nearing  the  stage  where  it, 
too,  will  have  to  submit  to  the  inevitable. 

Theoretically,  we  have  found  that  the  general  property  tax 
is  deficient  in  two  respects.  First,  the  theory  presupposes  that 
there  is  an  ascertainable  general  property— a  definite  surplus 
of  assets  over  liabilities.    In  primitive  social  conditions  this  is 


1    ' 


62 


ESSAYS  IN   TAXATION 


I 


true;  there  is  a  composite  mass  of  property,  because  there  is  no 
industrial  differentiation.  But  in  the  modern  age  property  is 
split  up  into  a  hundred  elements,  so  that  if  we  attempt  to  tax 
each  element  separately,  it  is  often  impossible  to  decide  from 
which  category  deductions  are  to  be  made  for  indebtedness. 
An  individual,  for  instance,  owes  more  on  his  book  accounts 
than  is  due  to  him.  Granting  that  he  therefore  pays  no  tax 
on  his  book  accounts,  shall  he  be  permitted  to  deduct  this  sur- 
plus of  debt  from  the  value  of  his  real  estate?  This  is  mani- 
festly inadmissible.  And  yet  unless  this  is  done  he  is  taxed  not 
on  his  property,  but  on  his  surplus  of  debt — not  on  his  real 
assets,  but  on  what  he  owes;  not  on  his  ability,  but  on  his 
liability.  The  theory  of  the  property  tax  is  not  carried  out; 
and  it  cannot  be  carried  out  because  the  conditions  of  the 
theory  fail.  The  general  mass  of  property  has  disappeared,  and 
with  it  vanishes  the  foundation  of  the  general  property  tax. 

Secondly,  the  property  tax  is  faulty,  because  property  is 
no  longer  a  criterion  of  faculty  or  tax-paying  capacity.  Two 
equal  masses  of  property  may  be  unequally  productive,  and 
hence  unequally  affect  the  margin  of  income  from  which  the 
public  contributions  are  paid.  The  standard  of  ability  has 
been  shifted  from  property  to  product;  the  test  now  is  not  the 
extent,  but  the  productivity,  of  wealth.  And  since  revenue  is  a 
better  index  than  wealth,  the  vast  class  of  earnings  derived 
not  from  property  but  from  exertion  is  completely  and  unjusti- 
fiably exempted  by  the  taxation  of  property  alone.  The  theory 
of  the  property  tax  again  fails  because  the  conditions  of  the 
theory  have  disappeared. 

Practically,  the  general  property  tax  as  actually  admin- 
istered is  beyond  all  doubt  one  of  the  worst  taxes  known  in  the 
civilized  world.  Because  of  its  attempt  to  tax  intangible  as 
well  as  tangible  things,  it  sins  against  the  cardinal  rules  of  uni- 
formity, of  equality  and  of  universality  of  taxation.  It  puts 
a  premium  on  dishonesty  and  debauches  the  public  conscience; 
it  reduces  deception  to  a  system,  and  makes  a  science  of  knavery; 
it  presses  hardest  on  those  least  able  to  pay;  it  imposes  double 
taxation  on  one  man  and  grants  entire  immunity  to  the  next. 
In  short,  the  general  property  tax  is  so  flagrantly  inequitable, 
that  its  retention  can  be  explained  only  through  ignorance  or 
inertia.  It  is  the  cause  of  such  crying  injustice  that  its  altera- 
tion or  its  aboHtion  must  become  the  battle  cry  of  every  states- 
man and  reformer. 


AMERICAN  BIBLIOGRAPHY  OF  THE  GENERAL 

PROPERTY  TAXI 

1.  Ames,  John  H.   The  Taxation  of  Personal  Property.    Des  Moines, 

1877. 

2.  Ames,  John  H.    The  Taxation  of  Real  Property  and  Corporations. 

Des  Moines,  1878. 

3.  Andrews,  George  H.    Taxation.    Address  .  .  .  before  the  As- 

sembly Committee  of  Ways  and  Means  of  the  State  of  New 
York.    New  York,  1874. 

4.  Andrews,  George  H.   Unequal  State  Taxation.   New  York,  1875. 

5.  Andrews,  George  H.    Taxes  and  Assessments  in  New  York  City. 

New  York,  1876. 

6.  Andrews,  George  H.   Twelve  Letters  on  the  Future  of  New  York. 

New  York,  1877. 

7.  Bemis,  E.  W.    The  Taxation  Problem  in  Chicago.    Chicago,  1897. 

8.  Bentox,  J.  H.,  Jr.    Inequality  of  Tax  Valuation  in  Massachusetts. 

Boston,  1890. 

9.  Bernard,  Alfred  D.     Some  Principles  and  Problems  of  Real 

Estate  Valuation.    Privately  printed,    n.  p.,  1913. 

10.  Brown,  Albert  0.    Common  Methods  of  Valuing  Property  for 

Taxation.    Manchester,  N.  H.,  1914. 

11.  Brown,  Frederick  J.   Short  Talks  on  Taxes  with  special  reference 

to  the  Hayes  Bill  of  1892.    Baltimore,  1894. 

12.  Cederstrom,  Sig.     Unjust  Taxation.    A  Compilation  of  Facts 

and  Figures  showing  the  Injustice  and  Inequality  of  Real  Estate 
Taxation  in  the  City  of  New  York.    Brooklyn,  1913. 

13.  Cochran,  Thomas.    Local  Taxation.    Philadelphia,  1871. 

14.  Cochran,  Thomas.     Methods  of  Valuation  of  Real  Estate  for 

Taxation.    1874. 

15.  CowLES,  H.  v.,  and  Leenhouts,  J.  H.    How  to  Assess  Property 

m  Cities  and  Rural  Towns.    Madison,  Wis.,  1914. 

>  Exclusive  of  articles  in  periodicals,  of  addresses  and  papers  in  the  Na- 
tional Tax  Conferences,  in  the  National  Tax  Bulletin  and  in  the  Publications 
iJAu^u-T  ^^^^f^*'^  Association,  of  reports  of  official  commissions, 
and  of  the  histories  of  taxation  in  the  separate  states  and  cities.  For  the 
bibliography  of  special  phases  of  the  property  tax  see  the  bibliographical 

TaZZ^  iSiT  '^^P^T  °^  ^^^  ^'^^'  ^"  *^^  Bibliography  of  Works  on 
Taxa^ton  by  EUen  M.  Sawyer,  published  in  1898  as  a  special  Bulletin 
oi  the  btate  Library  of  Massachusetts  Will  be  found  a  fairly  good  selection 
of  articles  on  the  subject  up  to  that  date.  ^        selection 

63 


1^ 


I    • 


fl 


i  i 


t^ 


64  ESSAYS  IN  TAXATION 

16.  Ely,  Richard  T.,  and  Finley,  J.  H.   Taxation  in  American  States 

and  Cities.    New  York,  1888. 

17.  Endicott,  William,  Jr.    The  Taxation  of  Tangible  Things.    Bos- 

ton, 1875. 

18.  Ensley,  Enoch.    The  Tax  Question:  What  should  be  taxed  and 

how  it  should  be  taxed.  Suggestions  for  the  People  of  Tennessee 
to  consider.  Nashville,  1873.  2d  edition,  edited  by  Lawson 
Purdy,  New  York,  1906. 

19.  Freeman,  Douglass.   Tax  Reform  in  Virginia.   Richmond,  1911. 

20.  Green,  J.  P.   The  Niles  Tax  Bill,  No.  344,  H.  R.,  before  the  Com- 

mittee on  Ways  and  Means.    Argument.    Philadelphia,  1893. 

21.  Hamilton,  John.   The  Tax  Problem.   An  Address  delivered  at  the 

Annual  Meeting  of  the  Pennsylvania  State  Board  of  Agriculture. 
Harrisburg,  1891. 

22.  Haugen,  N.  p.    The  Exemption  of  Credits.    Madison,  1903. 

23.  Hinckley,  Isaac.    Unequal  Taxation  in  Delaware.    Philadelphia, 

1875. 

24.  Hills,  Thomas.    Address  on  Taxation.    Boston,  1890. 

25.  Howe,  Samuel  T.   Assessment  and  Taxation  in  Kansas.   Chicago, 

1913. 

26.  JuDSON,  F.  M.    Justice  in  Taxation  as  a  Remedy  for  Social  Dis- 

content.   St.  Louis,  1898. 

27.  Knott,  R.  W.,  and  Humphrey,  A.  P.    Municipal  Taxation:  an 

Argument  submitted  to  the  Revisory  Commission.    Louisville, 

1892. 

28.  Lane,  Jonathan  A.    Address  on  Taxation  at  a  Meeting  of  the 

Boston  Executive  Business  Association.    Boston,  1891. 

29.  Le  Rossignol,  Jas.  E.    Taxation  in  Colorado.    Denver,  1902. 

30.  Levine,  Louis.    Equalizing  Tax  Burdens  in  Montana.    Missouri, 

1917. 

31.  LuTZ,  H.  L.,  and  Todd,  E.  S.   The  Reform  of  the  Ohio  Tax  System. 

n.  p.,  1917. 

32.  LuTZ,  H.  L.     The  Classification  of  Property  for  Taxation.     A 

Handlx)ok  of  Reference  prepared  for    the    Ohio    Taxpayers' 
League.    Columbus,  1919. 

33.  Matschek,  C.  W.    The  General  Property  Tax  in  North  Dakota. 

n.  p.,  1911. 

34.  Minot,  William,  Jr.    Local  Taxation  and  Public  Extravagance. 

Boston,  1877. 

35.  Minot,  William,  Jr.    Taxation  in  Massachusetts.    2d  edition. 

Boston,  1877. 

36.  Olmstead,  M.  E.    Niles  Tax  Bill,  House  Bill  No.  344.    Argument 

before  the  Ways  and  Means  Committee  of  the  House  of  Repre- 
sentatives of  Pa.    Harrisburgh,  1893. 

37.  Peabody,  a.  p.    Address  on  Taxation.    Boston,  1893. 

38.  Plehn,  C.  C.    The  General  Property  Tax  in  California.    1897. 


THE  GENERAL  PROPERTY  TAX 


65 


39.  Purdy,  Lawson.    The  Burdens  of  Local  Taxation  and  who  bear 

them.    Chicago,  1901. 

40.  QuiNCY,  Josiah  p.    Tax  Exemption  no  Excuse  for  Spoliation. 

Boston,  1874. 

41.  Ropes,  John  C.    Taxation  of  Mortgaged  Real  Estate.    Boston, 

1881. 

42.  ScROGGS,  William  O.    Tax  Revision  in  Louisiana.    Its  Necessity 

and  its  Practicability.    Baton  Rouge,  1912. 

43.  Shearman,  Thomas  G.    Taxation  of  Personal  Property,  imprac- 

ticable, unequal  and  unjust.    New  York,  1895. 

44.  Sherman,  Isaac.   Exclusive  Taxation  of  Real  Estate  and  the  Fran- 

chises of  a  few  specified  moneyed  Corporations  and  Gas  Com- 
panies.   New  York,  1875. 

45.  Sturgis,  Roger  F.    Taxation:  a  Problem.    Boston,  1911. 

46.  Swan,  Charles  Herbert.    Impersonal  Taxation.    A  Discussion 

of  some  Rights  and  Wrongs  of  Governmental  Revenue.  Phil- 
adelphia, 1907. 

47.  Wells,  David  A.    Theory  and  Practice  of  Local  Taxation  in  the 

United  States.    Boston,  1874. 

48.  Wells,  David  A.    The  Reform  of  Local  Taxation.    Boston,  1876. 

49.  Wells,  Jas.  L.    The  Assessment  of  Real  and  Personal  Property 

for  Taxation.    New  York,  1902. 

50.  Weyl,  W.  E.,  and  others.     Equitable  Taxation:  Six  Essays  in 

answer  to  the  question:  What  Changes  in  existing  Plans  are 
necessary  to  secure  an  equitable  Distribution  of  Taxation  for 
the  Support  of  Governments.    New  York,  1892. 

51.  Whitmore,  William  H.     Unjust  Taxes.     A  Criticism  of  the 

Massachusetts  System  of  Local  Taxation.    Boston,  1877. 

52.  Winn,  Henry.    An  Address  on  Unequal  Taxation,    n.  p.,  1890. 

53.  Winn,  Henry.    Massachusetts  Tax  Problems.    Boston,  1896. 

54.  ZoLLER,J.  F.   Taxation  of  Intangible  Personal  Property.   Schenec- 

tady, N.  Y.,  1915. 
Apace  with  Progress.    The  Case  for  Tax  Revision.    Compiled  by  the 

Civic  Federation.    Chicago,  1916. 
Real  Estate  and  its  Taxation  in  Philadelphia.     Questions  and  Answers 

relating  to  a  Proposed  System  of  Assessment.    PubUshed  by  the 

Mayor.    1913. 


THE  SINGLE  TAX 


67 


CHAPTER  III 


THE   SINGLE   TAX 


Among  the  projects  for  social  and  tax  reform,  few  have  been 
more  earnestly  and  enthusiastically  supported  than  the  single 
tax.  Many  persons,  however,  have  only  a  faint  idea  of  what  the 
project  really  is;  while  others  have  been  so  influenced  by  the 
alluring  arguments  of  its  advocates,  that  they  have  not  troubled 
themselves  to  investigate  the  problem  from  the  standpoint  of 
modern  economic  science.  Let  us  attempt,  in  the  following 
pages,  to  explain  the  nature  of  the  single  tax  and  to  consider 
critically  the  arguments  that  are  commonly  urged  in  its  fa^o^. 

I.  What  is  the  Single  Tax? 

In  the  first  place,  the  single  tax  denotes,  as  its  name  implies, 
the  only  tax,  the  exclusive  tax,  the  tax  on  some  one  class  of 
things.    The  idea  that  the  wants  of  the  state  may  be  supplied 
by  such  a  tax  is  not  a  new  one.    During  the  seventeenth  and 
eighteenth  centuries,  a  band  of  reformers  in  England  as  well 
as°on  the  continent  put  forward  the  idea  of  a  single  tax  on  ex- 
pense.^    So  many  of  the  privileged  classes  had  succeeded  in 
securing  exemption  from  the  various  direct  taxes,  that  it  was 
hoped  to  realize  a  substantial  universality  of  taxation  by  taxing 
everybody  on  his  expenditure;  and  since  it  was  supposed  that 
this  tax  could  be  evaded  by  no  one,  it  was  for  a  time  very  popular. 
Later  on  in  the  eighteenth  century  there  was  a  party  in  Eng- 
land whose  motto  was  a  single  tax  on  houses.^    Again,  at  the 
beginning  of  the  nineteenth  century  the  experience  of  England 
with  the  income  tax  led  a  number  of  writers  on  the  continent 
to  advance  the  plan  of  a  single  tax  on  incomes.^    Toward  the 
middle  of  the  century,  again,  a  single  stamp  tax  was  advocated 

^  Supra,  p.  S. 

2  Cf.  Seligman,  The  Shifting  and  Incidence  of  Taxation,  3d  ed.,  1910,  pp. 

89-95.  ^  „  _,     _ 

3  For  the  German  advocates  of  this  single  tax  see  Sebgman,  Th£  Income 

Tax,  1911,  pp.  234-236. 

66 


in  France,^  and  a  generation  later,  the  project  of  a  single  tax  on 
capital  was  enthusiastically  advocated  not  by  socialists,  but  by 
conservative  reformers.  ^  The  single  tax  proclaimed  by  Henry 
George  is  thus  simply  the  last  of  many  similar  schemes  that  have 
been  propounded;  and  it  is  not  improbable  that  after  it  has  dis- 
appeared economists  of  the  future  will  be  occupied  in  dealing 
with  yet  another  form  of  smgle  tax. 

The  present  scheme  is  a  single  tax  on  land  values — that  is, 
a  tax  on  the  value  of  the  bare  land  irrespective  of  the  buildings 
or  other  improvements  in  or  on  the  land.  Curiously  enough 
the  taxation  of  land  has  been  supported  by  two  lines  of  argument 
which  are  fundamentally  opposed.  Thus  about  a  generation  ago 
Mr.  Isaac  Sherman,  an  eminent  citizen  of  the  city  of  New  York, 
proposed  a  plan  by  which  all  state  and  local  taxes  at  least  were 
to  be  levied  on  real  estate.  Mr.  Sherman  and  his  followers  con- 
fessed that  taxes  ought  to  be  borne  by  the  whole  community. 
They  favored  the  taxation  of  land  on  the  theory  that  the  tax 
would  be  shifted  from  the  landowner  to  the  consumer,  and  would 
thus  be  diffused  throughout  the  community.  As  every  one  is  a 
consumer,  each  would  in  the  end  bear  his  share  of  the  burden. 
The  tax  would,  moreover,  have  the  additional  merits  of  sim- 
plicity and  convenience. 

Many  people  to-day  declare  their  adhesion  to  a  tax  on  land 
for  this  reason.  But  it  is  remarkable  that  what  constitutes 
the  chief  advantage  of  the  tax  in  the  eyes  of  this  party  is  re- 
garded in  precisely  the  opposite  way  by  the  real  advocates 
of  the  single  tax  on  land  values.  Mr.  Sherman  said  that  the 
tax  on  real  estate  is  to  be  recommended  because  it  falls  only 
nominally  on  the  owner,  and  is  in  fact  shifted  to  the  consumer. 
Mr.  George  said  that  the  tax  on  land  values  w^ill  stay  where  it 
is  put,  namely,  on  the  landowner,  and  that  it  is  to  be  recom- 
mended precisely  because  it  will  not  be  shifted  to  the  consumer. 
The  difference  between  the  two  theories  could  not  be  more 
fundamental. 

As  between  these  two  theories,  there  is  a  substantial  con- 
census of  opmion  among  economists  that  Mr.  George  is  correct 
1^  rom  the  time  of  Ricardo,  it  has  been  well-nigh  universally  con- 
tessed  that  a  tax  on  land  values,  i.e.  sl  tax  on  economic  rent,  ! 

ParH^1850™^^^°''  ^''''^^^  ^'^'^'^^^  ''''^'^  ''''^^^'^  ^^r  la  fortune  publique, 
co:J7::'1L'!'^^^^^        ^^  '^"^-^"-    ^-  *^-  ^  ^eUgman,  The  /.. 


68 


ESSAYS  IN  TAXATION 


THE  SINGLE  TAX 


69 


If!    , 


will  fall  wholly  on  the  owner.^    This  is  precisely  the  reason  why 
the  scheme  is  advocated  by  the  single-taxers,  who  desire  to  tax 
the  landowner  out  of  existence-to  take  away  from  the  owner 
of  the  land  all  his  revenue  rights  in  the  land.    The  essential 
antagonism  between  the  two  schemes,  therefore    cannot  be 
emphasized  too  strongly.    The  one  desires  a  land  tax  because 
it  will  be  borne  by  the  whole  community;  the  other  desires  a 
tax  on  land  values  because  it  will  be  borne  not  by  the  whole 
community,  but  by  a  particular  class.    Yet  many  Pe;^«o^?^^ho 
really  favor  the  former  theory  mistakenly  give  their  adhesion  to 
the  latter.    There  are  many  self-styled  single-taxers  who  simply 
believe  that  a  land  tax  is  the  most  convement  of  all  methods  tor 
securing  the  desired  equality  of  burden.    In  reality,  there  is  no 
kinship  between  them  and  the  single-taxers  proper.    Mr.  George 
warns  us  not  to  confuse  a  tax  on  land  with  a  tax  on  land  value. 
Another  point  which  needs  especial  emphasis  is  the  distinc- 
tion to  be  observed  between  the  single  tax  and  a  tax  on  land 
values     The  single  tax  with  which  we  have  to  deal  is  indeed  a 
tax  on  land  values,  but  a  tax  on  land  values  is  not  necessarily 
a  single  tax.     The  essential  feature  of  the  single  tax  /s  the 
singleness  of  the  tax-the  demand  for  the  abolition  of  all  other 
taxes  and  the  substitution  of  a  tax  on  land  values     This  is 
something  quite  different  from  the  demand  for  a  tax  on  land 
values  as  a  supplement  to  other  taxes.    The  addition  in  recent 
years  of  a  tax  on  land  values  to  the  tax  systems  of  vanous 
countries  must  not  be  interpreted  to  be  an  acceptance  of  the 
single-tax  philosophy.     The  more  modern  advocates  of  the 
-single  tax  limited,"  i.  e,  a  local  tax  on  land  values  plus  a  state 
tax  on  corporations,  plus  perhaps  a  national  income  tax  are 
really  not  single-taxers  at  all.     The  distinction  between  the 
single  tax  and  a  tax  on  land  values  is  of  fundamental  importance. 

11.  The  General  Theory 

The  general  economic  theory  on  which  the  demand  for  the 
single  tax  is  based  may  be  summed  up  in  a  few  words.  Land  is 
the  creation  of  God;  it  is  not  the  result  of  any  man  s  abor;  no 
one,  therefore,  has  a  right  to  own  land.  Increase  in  the  value 
of  land  is  due  mainly  to  the  growth  of  the  community;  like  the 
land  itself,  it  is  not  the  result  of  any  individual  effort;  it  is  an 
unearned  increment  which  properly  belongs  to  society.    More- 

1  See  Seligman,  TAe  ShiSting  and  Inddence  of  Taxation,  3d  ed,  1910, 
pp.  281-287. 


over,  private  property  in  land  is  undoubtedly  the  cause  of  all 
social  evils.  It  therefore  becomes  the  duty  of  the  government 
to  take  what  rightfully  belongs  to  the  whole  community.  Every 
one  may  still  retain  the  result  of  his  own  labor;  but  the  value 
of  the  bare  land,  the  economic  rent,  must  be  taken  for  the  state. 
In  this  way,  and  in  this  way  alone,  can  the  social  problem  be 
solved.  The  consequences  are  epitomized  as  follows  in  the 
platform  of  the  Single  Tax  League:  "It  would  solve  the  labor 
problem,  do  away  with  involuntary  poverty,  raise  wages  in  all 
occupations  to  the  full  earnings  of  labor,  make  over-production 
impossible  until  all  human  wants  are  satisfied,  render  labor- 
saving  inventions  a  blessing  to  all,  and  cause  such  an  enormous 
production  and  such  an  equitable  distribution  of  wealth  as 
would  give  to  all  comfort,  leisure,  and  participation  in  the  ad- 
vantages of  an  advancing  civilization." 

This  is  an  inviting  prospect.  It  is  not  so  much  a  method  of 
tax  reform,  as  a  panacea  for  human  ills,  that  is  here  set  forth. 
It  would  be  interesting  to  discuss  this  fine  fabric  of  the  ideal. 
But  we  must  be  more  modest  and  confine  our  attention  to  the 
scheme  primarily  as  a  practical  method  of  tax  reform. 

In  order  to  attain  a  basis  for  this  discussion,  it  is  necessary 
to  allude  to  the  two  fundamental  doctrines  on  which  the  plan 
is  founded.  The  first  is  the  underlying  theory  of  private 
property;  the  second  is  the  theory  of  the  relation  of  the  individ- 
ual to  the  public  purse. 

In  the  first  place,  the  single-tax  theory  of  property  is  the 
labor  theory — the  theory  that  individual  human  labor  con- 
stitutes the  only  clear  title  to  property.  It  would  be  interesting, 
were  there  space,  to  trace  the  genesis  of  this  doctrine.  The 
Romans,  as  is  well  known,  had  an  entirely  different  theory — 
the  occupation  theory,  based  on  the  right  of  the  first  occupant. 
Against  this  rather  brutal  doctrine,  which  in  the  early  middle 
ages  paved  the  way  for  intolerable  abuses,  the  philosophers 
advanced  the  labor  theory,  hoping  thereby  to  bring  about  a 
reform  in  actual  institutions.  The  labor  theory  went  hand  in 
hand  with  the  doctrine  of  natural  rights,  which  was  the  result 
of  an  earnest  attempt  to  abolish  the  abuses  of  the  ancien  regime, 
and  which  came  to  a  climax  in  the  eighteenth  century.  Modern 
jurisprudence  and  modern  political  philosophy,  however,  have 
mcontestably  proved  the  mistake  underiying  this  assumption 
of  natural  law  or  natural  rights.  They  have  shown  that  natural 
law  is  simply  the  idea  of  particular  thinkers  of  a  particular  age  of 


Ill 


I 


H 


! 


I 


li 


III 


70 


ESSAYS  IN  TAXATION 


what  ought  to  be  law.  These  particular  thinkers,  indeed,  often 
influence  the  social  consciousness,  as  they  in  turn  are  influenced 
by  it,  so  that  natural  law  may  be  called  law  in  the  making.  But 
at  any  given  time  it  represents  simply  an  ideal.  Whether  that 
ideal  will  approve  itself  to  society  depends  on  a  variety  of  cir- 
cumstances, but  chiefly  on  the  question  whether  society  is 
prepared  for  the  change.  Just  as  the  modern  theory  of  juris- 
prudence is  sociological  in  character,  so  also  the  modem  theory 
of  property  may  be  called  the  social  utility  theory.^ 

The  social  utility  theory  says  that  just  as  all  law,  all  order  and 
all  justice  are  the  direct  outgrowths  of  social  causes,  and  just 
as  private  ethics  is  nothing  but  the  consequence  of  social  ethics, 
80  private  property  is  to  be  justified  simply  by  the  fact  that  it 
is  the  last  stage  of  a  slow  and  painful  social  evolution.    At  the 
outset,  property,  and  especially  property  in  land,  was  largely 
owned  in  common.    It  was  only  through  the  gradual  progress  of 
economic  and  social  forces  that  private  property  came  to  be 
recognized  as  tending  on  the  whole  to  further  the  welfare  of 
the  entire  community.    The  social  utility  theory  does  not,  of 
course,  mean  that  what  has  once  been  must  always  be.    It  is 
not  a  reactionary  doctrine  which  looks  upon  all  that  is  as  good. 
It  simply  maintains  that  the  burden  of  proof  is  always  upon 
the  party  urging  the  change;  and  that  when  the  change  ad- 
vocated is  a  direct  reversal  of  the  progress  of  centuries,  and 
a  reversion  to  primitive  conditions  away  from  which  all  history 
has  travelled,  the  necessity  for  its  absolute  proof  becomes  far 
stronger.    The  nationalization  of  land  is  a  demand  which,  in 
order  to  win  general  acceptance,  must  be  based  on  theories 
independent  of  the  doctrine  of  natural  rights. 

Even  though  we  accept  the  theory  of  natural  rights,  we  need 
not  therefore  accept  the  single  tax.  If  it  is  said  that  the  value 
of  land  is  the  work  of  the  community,  and  that  in  consequence 
every  one  has  a  natural  right  to  it,  how  can  we  logically  deny 
that  the  value  of  any  so-called  product  is,  at  least  partly,  the 
'  work  of  the  community?  Mr.  George  bases  his  defence  of  private 
property  in  commodities  other  than  land  on  the  labor  theory. 
Yet  individual  labor,  it  may  be  said,  has  never  by  itself  produced 
anything  in  civilized  society.    Take,  for  example,  the  workman 

1  For  a  good  exposition  of  the  insufficiency  of  the  doctrine  of  natural 
rights  a  discussion  of  which  would  be  out  of  place  here,  the  reader  is  referred 
to  Ritchie,  Natural  Rights,  1895;  and,  with  special  reference  to  the  land 
question,  to  Huxley's  essay  on  "Natural  Rights,"  in  his  Collected  Essays. 


THE  SINGLE  TAX 


71 


fashioning  a  chair.  The  wood  has  not  been  produced  by  him;  it 
is  the  gift  of  nature.  The  tools  that  he  uses  are  the  result  of  the 
contributions  of  others;  the  house  in  which  he  works,  the  clothes 
he  wears,  the  food  he  eats  (all  of  which  are  necessary  in  civilized 
society  to  the  making  of  a  chair),  are  the  result  of  the  contribu- 
tions of  the  community.  His  safety  from  robbery  and  pillage — 
nay,  his  very  existence — ^is  dependent  on  the  ceaseless  co- 
operation of  the  society  about  him.  How  can  it  be  said,  in  the 
face  of  all  this,  that  his  own  individual  labor  wholly  creates 
anything?  If  it  be  maintained  that  he  pays  for  his  tools,  his 
clothing  and  his  protection,  it  may  be  answered  that  the  land- 
owner also  pays  for  the  land.  Nothing  is  wholly  the  result  of  un- 
aided individual  labor.  No  one  has  a  right  to  say:  This  belongs 
absolutely  and  completely  to  me,  because  I  alone  have  produced 
it.  Society,  from  this  point  of  view,  holds  a  mortgage  on  every- 
thing that  is  produced.  The  socialists  have  been  in  this  respect 
more  logical;  and  that  perhaps  explains  why  the  movement  to 
which  Mr.  George  gave  such  an  impetus  in  England  and  else- 
where is  fast  changing  from  one  in  favor  of  land  nationalization 
into  one  for  nationalization  of  all  means  of  production.  The 
socialists,  indeed,  as  well  as  Mr.  George,  are  in  error,  because 
the  premises  of  each  are  wrong.  It  is  not  the  labor  theory,  but 
the  social  utility  theory,  which  is  the  real  defence  of  private 
property.  But  if  we  accept  the  premises  of  the  single-taxers,  we 
are  inevitably  impelled  to  go  further  than  they  do.  The  dif- 
ference between  property  in  land  and  property  in  other  things 
is  from  the  standpoint  of  individual  versus  social  effort  simply 
one  of  degree,  not  of  kind. 

The  other  fundamental  doctrine  of  the  advocates  of  the  single 
tax  is  the  theory  of  benefit, — the  doctrine  that  a  man  ought  to 
contribute  to  public  burdens  in  proportion  to  the  benefits  that 
he  receives.  The  theory  is  that,  since  the  individual  gets  a 
special  advantage  from  the  community  in  the  shape  of  unearned 
increment,  he  ought  to  make  some  recompense.  To  this  con- 
tention, two  answers  may  be  made:  first,  that  the  benefit  theory 
of  taxation  is  inadequate;  and  second,  that,  even  if  it  were  true, 
It  would  not  support  the  single  tax.   Let  us  take  up  these  in  turn. 

It  IS  pointed  out  in  another  chapter  that  the  payments  made 
by  the  individual  to  the  government  are  exceedingly  diverse 
in  character.  1  Where  the  government  acts  simplv  as  a  private 
individual,  in  performing  certain  services  for  the  citizen,  the 

^  Infra,  chap.  xiv. 


^ 


72 


ESSAYS  IN  TAXATION 


THE  SINGLE  TAX 


73 


: 


l! 


I : 


:  il 


;  n 

M 


11 


II 


f(( 


t 


payment  is  a  price.    It  is  a  case  of  do  ui  facias.     The  govern- 
ment does  something;  the  individual  gives  something.    Agam, 
even  after  common  interests  have  developed,  the  individual 
may  ask  the  government  to  do  some  particular  thing  for  him, 
to  confer  some  privilege  upon  him.    He  may  wish  to  get  mar- 
ried or  to  run  a  cab.    For  this  particular  privilege  it  is  perfectly 
proper  that  the  government  should  make  a  charge— known  in 
modern  times  as  a  fee  or  toll.    Again,  the  government  may  be 
at  considerable  expense  in  laying  out  a  new  street,  the  result 
of  which  will  be  to  enhance  the  value  of  a  particular  plot  of 
ground.    There  is  here  no  reason  why  the  government  should 
not  demand  that  the  owner  of  this  plot  should  defray,  at  all 
events  in  part,  the  cost  of  this  improvement.    This  is  called  a 
special  assessment.    In  all  these  cases  the  individual  receives 
an  undeniable,  special  benefit  as  the  result  of  a  special  expendi- 
ture made,  or  privilege  conferred,  by  the  government.    The 
principle  of  give  and  take,  therefore,  is  applicable. 

On  the  other  hand,  there  are  certain  actions  of  the  govern- 
ment which  interest  the  whole  community,  and  from  which 
the  individual  receives  no  benefit,  except  what  accrues  to  him 
incidentally  as  a  member  of  the  community.     If  the  govern- 
ment undertakes  a  war,  no  one  citizen  is  benefited  more  than 
another.     If  the  government  spends  money  for  instituting  a 
public  school  system,  for  erecting  tribunals,  or  for  preserving 
the  public  health,  it  cannot  be  claimed  that  any  one  individual 
rsceives  a  measurable,  special  benefit;  all  are  equally  interested 
in  good  government.    When  payment  is  made  for  these  general 
expenditures— and  such  a  payment  is  called  a  tax— the  proper 
principle  of  contribution  is  no  longer  that  of  benefits  or  o. 
give  and  take,  but  of  ability,  faculty,  capacity.     Every  man 
must  support  the  government  to  the  full  extent,  if  need  be,  oi 
his  ability  to  pay.    He  does  not  measure  the  benefits  of  state 
action  to  himself  first,  because  these  benefits  are  quantitatively 
unmeasurable;  and  secondly,  because  such  measurement  un- 
plies  a  decidedly  erroneous  conception  of  the  relation  of  the 
individual  to  the  modern  state. 

At  one  time  the  doctrine  of  benefit  had  a  relative  justification. 
Two  centuries  ago,  when  the  absolute  rulers  of  central  Europe 
loaded  down  their  subjects  with  grievous  burdens  and  devoted 
the  profits  to  their  own  petty  pleasures— when  in  France,  for 
example,  the  peasant  was  taxable  d  merd  el  misencorde  of 
the  nobility— it  was  natural  that  a  school  should  arise  to  pro- 


test and  to  proclaim  the  principle  of  benefits.  Their  argument 
was  that  as  the  state  protects  everybody,  everybody  is  under  a 
duty  to  pay  taxes;  in  other  words,  their  plea  was  for  universal- 
ity of  taxation.  This  was  a  distinct  step  in  advance.  Later  on, 
however,  the  doctrine  was  stretched  to  assert  that  everybody 
should  pay  in  proportion  to  benefits  received,  with  the  implica- 
tion that  if  the  state  could  not  be  proved  to  confer  any  special 
benefit  on  the  individual,  he  should  not  be  held  to  pay  any- 
thing. 

As  thus  extended,  the  theory  has  been  rejected  by  well-nigh 
all  the  thinkers  of  the  last  fifty  years.  It  is  now  generally 
agreed  that  we  pay  taxes  not  because  the  state  protects  us,  or 
because  we  get  any  benefits  from  the  state,  but  simply  because 
the  state  is  a  part  of  us.  The  duty  of  supporting  and  pro- 
tecting it  is  bom  with  us.  In  civilized  society  the  state  is  as 
necessary  to  the  individual  as  the  air  he  breathes;  unless  he  re- 
verts to  stateless  savagery  and  anarchy  he  cannot  live  beyond 
its  confines.  His  every  action  is  conditioned  by  the  fact  of  its 
existence.  He  does  not  choose  the  state,  but  is  bom  into  it; 
it  is  interwoven  with  the  very  fibres  of  his  being;  nay,  in  the 
last  resort,  he  gives  to  it  his  very  life.  To  say  that  he  supports 
the  state  only  because  it  benefits  him,  is  a  narrow  and  selfish 
doctrine.  We  pay  taxes  not  because  we  get  benefits  from  the 
state,  but  because  it  is  as  much  our  duty  to  support  the  state 
as  to  support  ourselves  or  our  family;  because,  in  short,  the 
state  is  an  integral  part  of  us. 

The  principle  of  benefit,  moreover,  would  lead  us  into  the 
greatest  absurdities.  If  we  accept  it,  we  must  apply  it  logic- 
ally; we  must  not  restrict  its  beneficent  workings  to  the  land- 
owner. As  has  been  pointed  out  in  another  place,  ^  the  poor 
man,  according  to  the  theory  of  benefit,  ought  to  be  taxed 
more  than  the  rich,  because  he  is  less  able  than  the  rich  man  to 
protect  himself.  It  is,  however,  needless  to  discuss  this  point 
because,  as  we  have  seen  in  a  previous  chapter,  so  far  as  the 
individual  is  concemed,  ability  to  pay  is  not  only  the  ideal 
basis  of  taxation,  but  the  goal  toward  which  society  is  steadily 
working.  It  lies  instinctively  and  unconsciously  at  the  bottom 
of  many  of  our  endeavors  at  reform.  When  we  say  that  in- 
direct taxes  are  often  unfair  to  laborers,  we  mean  that  they 
are  less  able  than  the  wealthier  portion  of  the  community  to 

*  Cf.  Seligman,  Progressive  Taxation  in  Theory  and  Practice,  2d  ed.,  1908, 
pp.  150—157. 


74 


ESSAYS  IN  TAXATION 


»t 


sJ' 

1 

1 

I.I 

i 

pay  the  tax.  When  we  say  that  a  corporation  with  large  re- 
ceipts should  pay  more  than  one  with  small  receipts  we  do 
so  because  we  know  that  its  ability  to  pay  is  greater.  The  prin- 
ciple of  benefit  is,  therefore,  not  the  basis  of  taxation,  it  is 
the  princple  away  from  which  all  modem  science  and  progress 
have  been  working.  It  is  founded  on  a  false  political  philos- 
ophy and  it  can  result  only  in  a  false  political  economy. 

It  may  be  contended,  however,  that  the  doctrine  of  the  single- 
taxers  is  really  somewhat  different,  and  that  what  they  desire 
to  emphasize  is  the  principle  of  privilege  or  opportunity  rather 
than  that  of  benefit.  This,  however,  does  not  really  help  their 
case  It  is  undeniable  that  privilege  constitutes  an  important 
factor  in  the  tax  problem;  but  correctly  interpreted,  privilege 
as  we  shall  see  in  a  subsequent  chapter,^  is  simply  an  element 
in  taxable  abilitv.  The  lucrative  privileges  that  are  conferred 
on  an  individual  increase  his  income  or  his  property,  and  to  that 
extent  augment  the  modem  index  of  his  taxpaying  ability. 
There  is  therefore  no  real  opposition  between  the  two  concep- 
tions- but  it  is  obvious  that  privilege  is  the  minor  factor,  ability 
the  major.  Privilege  is  one  of  the  elements  that  constitute 
ability,  not  the  sole  element. 

The  result  of  this  consideration  is  that  a  tax  on  land  values 
is  legitimate  because  it  reaches  one  of  the  elements  .of  taxable 
ability.    But  the  conclusion  follows  with  equal  force  that  the 
demand  for  a  single  tax  on  land  values  is  inadmissible.     This 
is  true  for  two  reasons:  in  the  first  place  it  emphasizes  the  prin- 
ciple of  privilege  to  the  neglect  of  all  the  other  constituent  ele- 
ments of  faculty;  it  attempts  to  erect  into  the  superior  position 
■    a  point  of  inferior  importance;  it  takes  a  part  and  makes  of  it  a 
whole.    In  the  second  place,  even  if  the  principle  of  privilege 
were  put  into  this  position  of  pre-eminence,  the  single-taxers 
err  in  singling  out  a  particular  privilege  and  basing  their  sys- 
tem on  this,  to  the  exclusion  of  other  scarcely  less  important 
privileges.     This  point  will  he  more  fully  discussed  below, 
under  the  head  of  the  justice  of  the  single  tax.    Thus  m  a 
double  way  the  single-taxers  have  failed  to  gain  the  assent  of 
tax  scientists  and  tax  reformers.    The  arguments,  which  are  of 
unquestioned  validity  when  advanced  in  favor  of  the  addition 
of  a  land-value  tax  to  existing  fiscal  systems,  lose  their  force  in 
proportion  that  the  emphasis  is  laid  on  the  desirabihty  of  the 

single  tax. 

» Infra,  chap.  x. 


THE  SINGLE  TAX 


III.  Practical  Defects 


75 


Let  us  now  leave  the  discussion  of  principles  and  come  to  the 
objections  that  may  be  urged  against  the  single  tax  as  a  practical 
method  of  tax  reform.  To  a  certain  extent  indeed,  the  paths  of 
American  fiscal  reformers  and  of  the  single-taxers  are  parallel,  so 
that  up  to  a  given  point  it  is  the  advantages  rather  than  the  de- 
fects of  the  single-tax  movement  that  might  be  emphasized.  As  we 
have  pointed  out  in  a  preceding  chapter,  the  general  property  tax 
has  become  a  failure  in  America.  Every  serious  student  agrees 
that  the  personal  property  tax  as  a  part  of  the  general  property 
tax  must  be  abolished.  What  to  put  in  its  stead  is  another 
question  which  need  not  be  touched  upon  here.  But  the  old 
must  always  be  demolished  before  the  new  can  be  erected. 
Now  so  far  as  the  destructive  side  is  concerned,  single-taxers 
and  other  tax  reformers  may  go  hand  in  hand.  So  ingrained  is 
the  beUef  of  the  average  American  in  the  virtue  of  the  general 
property  tax  that  the  united  efforts  of  all  are  necessary  to  effect 
a  change.  And  where,  as  is  sometimes  the  case,  the  more 
moderate  single-taxers  will  go  further  and  advocate  practicable 
substitutes  for  the  present-day  property  tax,  there  is  still  more 
reason  for  co-operation.^  In  the  struggle  against  the  common 
enemy  there  is  no  time  for  the  combatants  on  the  same  side  to 
lay  stress  on  differences  of  opinion.  This  explains  why  it  is  that 
in  several  of  the  American  states  the  single-taxers  and  other 
tax  reformers  are  working  in  unison.  But  this  harmony  is, 
after  all,  destined  to  be  only  temporary.  After  a  time,  when  the 
period  for  real  constructive  work  arrives,  the  differences  are 
bound  to  make  themselves  felt  and  the  rift  will  reappear.  So 
that,  however  greatly  we  may  prize  the  co-operation  of  the  single- 
taxers  for  a  time,  the  emphasis  must  ultimately  again  be  put  on 
the  defects  of  the  scheme  as  a  practical,  constructive  solution 
of  tax  problems.  These  defects  may  be  summed  up  under  four 
heads:  First,  the  fiscal  defects;  second,  the  political  defects; 
third,  the  moral  defects;  and  fourth,  the  economic  defects. 

1.  Fiscal  Defects 

One  of  the  great  aims  of  every  sound  financial  system  is  to 
bring  about  an  equilibrium  of  the  budget— that  is,  to  avoid 

•  l^^S^?}^^  ™°®*  interesting  and  effective  of  the  modern  single-taxers 
IS  Mr.  Fillebrown  of  Boston.  Of.  especially  his  A.  B.  C.  of  Taxation  which 
has  gone  through  several  editions. 


i  j 


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t 

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Rltin 


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Hi 
I 


76 


ESSAYS  IN  TAXATION 


a  surplus  as  well  as  a  deficit.    Now,  while  many  taxes  may 
be  suddenly  lowered,  not  many  of  them  can  be  made  to  give 
a  suddenly  increased  yield.    One  of  the  cardinal  principles  of 
taxation,  therefore,  is  elasticity.    In  order  to  secure  this,  two 
conditions  are  necessary.    In  the  first  place,  the  source  from 
which  the  tax  is  derived  must  be  of  such  a  nature  that  an  in- 
crease of  the  rate  will  always  mean  an  increase  of  the  yield. 
There  should  be  in  the  source  of  taxation  a  reserve  power 
which  can  be  drawn  upon  in  case  of  need.     Secondly,  the 
revenue  should  be  secured  from  a  number  of  objects,  so  that 
the  shrinkages  or  deficits  temporarily  due  to  the  one  class  may 
be  made  good  by  the  increase  or  surplus  revenues  of  the  other 
class.    Among  the  elastic  taxes  is  the  income  tax,  and  it  is  well 
known  that  in  English  finance  one  of  the  chief  functions  of  this 
income  tax  is  to  preserve  the  equilibrium  of  the  budget.     So 
again,  certain  taxes  on  commodities  are  often  utiUzed  for  this 
purpose.     The  single  tax  on  land  values,  however,  is  utterly 
inelastic;  for  since,  according  to  the  theory  of  its  advocates, 
the  total  rental  value  is  to  be  taken  from  the  landowners,  the 
single  tax  cannot  be  increased.    Where  nothing  has  been  left, 
nothing  more  can  be  taken.    In  the  case  of  an  emergency  there 
would,  therefore,  be  no  possibility  of  increasing  the  revenues. 
Even  if  the  total  land  value  were  not  taken,  it  would  still  re- 
main true  that  a  direct  tax  on  the  unimproved  value  of  land  is 
far  more  inelastic  than  other  taxes;  for  when  the  supply  is 
constant  and  the  price  varies  with  the  conditions  of  demand, 
the  selling  value  as  well  as  the  rental  value  is  subject  to  far 
more  fluctuations  than  in  commodities  where  the  supply  may 
be  altered  at  pleasure.    Furthermore,  as  we  have  seen,  a  single 
tax  of  any  kind,  whether  on  lands  or  on  anything  else,  would 
be  less  elastic  than  a  system  of  taxes  where  one  may  be  played 
off  against  the  other.    Lack  of  elasticity  is  a  serious  defect  in 

the  single  tax.  .    . 

Another  fiscal  weakness  of  the  single  tax  is  that  it  inevitably 
intensifies  the  inequaUties  resulting  from  unjust  assessments. 
We  all  know  how  difficult  it  is  to  carry  out  laws  which  provide 
for  equal  assessments.  Under  the  real  estate  tax  in  the  United 
States,  for  example,  the  assessors  are  usually  sworn  to  rate  the 
property  at  its  actual  or  seUing  value,  and  the  selling  value  of 
a  piece  of  land  or  of  a  house  is  comparatively  easy  to  ascertain; 
yet  it  is  notorious  that  in  no  two  counties,  nay  even  in  no  two 
adjoining  pieces  of  property,  is  the  standard  of  assessment  the 


THE  SINGLE  TAX 


77 


same.  Thus  the  report  of  the  Iowa  Revenue  Commission  of 
1893,  states  that  realty  in  Iowa  was  assessed  at  from  seventeen 
to  sixty  per  cent  of  the  true  value.  It  is  well  known,  too, 
that  in  Chicago  adjacent  plots  of  real  estate  were  until  recently 
assessed  at  percentages  of  ridiculously  varying  degree.  Now, 
it  is  manifestly  not  so  easy  to  assess  the  land  values, — that  is, 
the  bare  value  of  the  land  irrespective  of  all  improvements, — 
as  it  is  to  assess  the  selling  value  of  a  piece  of  real  estate.  For 
instance,  an  acre  of  agricultural  land  near  a  large  town  may  be 
worth  $200;  but  if  used  for  truck-farming,  considerably  more 
than  $200  may  have  been  expended  on  it  during  the  last  century 
or  two.  Who  can  tell  how  much  of  the  $200  present  value  is  the 
value  of  the  bare  land  and  how  much  is  to  be  assigned  to  the 
labor  expended?  Under  the  present  method  we  have  at  least 
a  definite  test — ^the  selling  value;  under  the  new  method  we 
should  have  no  test  at  all.  There  is  every  likelihood,  therefore, 
that  the  difficulties  of  the  present  situation  would  be  intensified. 
During  the  past  few  years  a  number  of  American  cities  and 
a  few  states  have  initiated  the  system  of  differentiating  between 
assessments  on  land  values  and  on  improvements.  In  every 
case,  however,  by  improvements  is  meant  in  practice  not  the 
improvements  in  the  land,  but  the  improvements  on  the  land, 
and  not  even  all  the  improvements  on  the  land,  but  only  those 
consisting  of  buildings.  In  the  cities  this  is  of  course  all  that  is 
needed;  but  in  the  rural  districts  no  effort  is  made  to  ascertain 
land  values  in  the  proper  sense  of  the  term.  Any  attempt  to  do 
so  would  at  once  engender  the  difficulties  referred  to  above. 
Moreover,  under  the  present  system,  inadequate  as  it  is,  there 
is  always  a  chance  that  the  imperfect  enforcement  of  a  particu- 
lar tax  law  will  be  offset  by  the  assessment  of  other  taxes, 
direct  or  indirect.  Under  the  single  tax  not  only  would  there 
be  more  difficulty  than  at  present  in  making  the  original  assess- 
ment, but  any  inequality  in  the  assessment  would  be  seriously 
intensified  by  the  very  fact  that  it  is  a  single  tax. 

2.  Political  Defects 
The  adoption  of  the  single  tax  means  the  total  abolition  of 
all  custom  houses  and  import  duties;  it  means  that  there  can 
be  no  such  thing  as  a  system  of  protection  to  home  industry. 
Many  would,  it  is  true,  favor  the  single  tax  precisely  on  this 
account;  but  there  are  some  self-styled  " single-taxers "  who 
behevQ  that  as  a  matter  of  national  policy  there  is  a  justifica- 


78 


ESSAYS  IN   TAXATION 


THE  SINGLE  TAX 


79 


I 


if! 


M 


tion  for  import  duties.  Whatever  we  may  think  of  the  economic 
justification  of  import  duties,  it  must  be  recognized  that  they 
may  sometimes  form  an  important  poUtical  weapon.  It  is 
clear,  however,  that  leaving  the  question  of  protection  entirely 
aside,  the  adoption  of  the  single  tax  will  make  it  impossible 
to  utilize  import  duties  for  political,  fiscal  or  other  purposes. 

In  the  second  place,  the  adoption  of  the  single  tax  would 
render  it  impossible  for  governments  to  utilize  the  taxing  power 
as  a  political  or  social  engine.    For  instance,  the  United  States 
government  now  imposes  a  tax  on  the  circulation  of  state  bank- 
notes in  order  to  bring  about  certain  desirable  results  in  the 
currency   situation.     Again,   the   United   States  govermnent 
levies  a  high  tax  on  opium,  not  for  the  purpose  of  revenue,  but 
in  order  to  discoura:';e  the  consumption  of  opium;  and  it  also 
assesses  a  tax  on  oleomargarine,  primarily  in  order  to  ensure 
the  purity  of  butter.    Under  the  single  tax,  all  such  efforts  would 
be  impossible.    Finally,  to  mention  only  one  other  example, 
one  of  the  chief  methods  of  dealing  with  the  drink  question 
is  through  the  imposition  of  high  liquor  licenses,  the  fiscal  im- 
portance of  which  is  only  secondary.    Under  the  single  tax  we 
should  l)c  prevcntcHl  from  attacking  the  problem  in  that  way. 
Governments  have  always  made  use  of  the  taxing  power  to 
regulate  and  to  destroy,  as  well  as  to  yield  a  revenue.    Were 
the  single  tax  to  be  adopted,  this  power  would  be  eliminated.^ 
Thirdly,   the  political  results  of  the  single  tax  would  be 
dangerous  in  another  way.    So  far  as  there  is  any  truth  in  the 
assertion  that  in  a  democracy  it  involves  some  risk  for  a  small 
class  to  pay  the  taxes  and  for  a  large  class  to  vote  them,  it  is 
especially  applicable  to  the  single  tax.    Since  the  "unearned 
increment"  would  flow  of  itself,  silently  and  noiselessly  into  the 
treasury,  there  would  be  no  need  of  a  budget;  and  the  sense 
of  responsibility  in  the  citizens  would  be  perceptibly  diminished. 
It  is  well  known  that  liberty  has  been  intimately  bound  up  with 
the  contest  against  unjust  taxation;  the  constitutional  history 
of  England  is  to  a  large  extent  a  history  of  the  struggle  of  the 
people  to  gain  control  of  the  treasury;  the  American  Revolution 
was  precipitated  by  a  question  of  taxation;  the  French  Revolu- 
tion was  brought  about  primarily  by  the  fiscal  abuses  of  the 
ancien  regime.    To  take  away,  then,  from  the  vast  majority  of 

1  Mr.  George  indeed  states  that  he  does  not  object  to  repressive  taxes, 
because  neither  a  land  nor  a  revenue  question  is  involved.  But  clearly  the 
tax  would  then  not  be  a  "single"  tax. 


citizens  the  sense  of  their  obligation  to  the  government  and  to 
divorce  their  economic  interests  from  those  of  the  state  would, 
especially  in  a  modern  democracy,  be  fraught  with  danger. 

3.  Ethical  Defects 

The  advocates  of  the  single  tax  love  to  base  their  arguments 
on  the  ground  of  justice.  In  this  they  are  certainly  wise;  for 
even  though  all  other  arguments  were  in  its  favor,  if  the  justice 
of  the  single  tax  could  be  successfully  impugned,  it  would  be 
foredoomed  to  failure.  Let  us  then  ascertain  whether  it  is 
indeed  true  that  the  single  tax  is  an  equitable  method  of  taxa- 
tion. 

The  two  great  canons  of  justice  in  taxation  are  universality 
and  uniformity  or  equality.  If  anything  has  been  gained  by 
the  revolutions  of  the  eighteenth  century  and  b}^  the  growing 
public  conscience  of  the  nineteenth  and  twentieth,  it  is  a  recog- 
nition of  the  fact  that  all  owe  a  duty  to  support  the  state,  that 
a  system  of  wholesale  exemptions  is  iniquitous,  and  that  every 
taxpayer  should  be  treated  according  to  the  same  standard. 
Judged  by  any  or  all  of  these  tests,  can  it  be  seriously  main- 
tained that  the  single  tax  is  an  equitable  form  of  taxation? 

Toward  the  close  of  the  eighteenth  century,  there  was  a 
school  of  French  writers,  the  Physiocrats,  who  first  advocated 
the  plan  of  a  single  tax  on  land — the  famous  impot  unique.  It 
was  considerably  talked  about  until  Voltaire  turned  his  caustic 
pen  upon  them  and  wrote  the  celebrated  essay  Uhomme  a 
quarante  ecus— the  man  of  forty  crowns — ,  one  of  the  most 
effective  bits  of  mordant  sarcasm  ever  written.  Voltaire  pic- 
tured the  position  of  the  French  peasant  toiling  laboriously, 
amid  conditions  of  unspeakable  distress,  but  succeeding  in  get- 
ting from  the  soil  a  product  equivalent  to  forty  crowns.  The 
tax-gatherer  comes  along,  finds  that  the  peasant  can  manage  to 
keep  body  and  soul  together  on  twenty  crowns,  and  takes  away 
the  other  twenty.  Then  the  peasant  meets  an  old  acquaint- 
ance, originally  poor,  who  has  been  left  a  fortune  of  400,000 
crowns  a  year  in  money  and  securities.  He  rolls  along  the  high- 
way in  a  six-horse  chariot,  with  six  lackeys,  each  with  double 
the  peasant's  income;  his  maitre  d' hotel  gets  2,000  crowns  salary 
and  steals  20,000;  his  mistress  costs  80,000  crowns  a  year. 
''You  pay  of  course  half  your  income,  200,000  crowns,  to  the 
state?"  asked  the  peasant.  ^'You  are  joking,  my  friend," 
answered  he,  ''I  am  no  landed  proprietor 'like  you.     The  tax- 


80 


ESSAYS  IN  TAXATION 


gatherer  would  be  an  imbecile  to  assess  me;  for  everythmg  I 
have  comes  ultimately  from  the  land,  and  somebody  has  paid 
the  tax  already.  To  make  me  pay  would  be  intolerable  double 
taxation.  Ta-ta,  my  friend;  you  just  pay  your  single  tax,  enjoy 
in  peace  your  clear  income  of  twenty  crowns;  serve  your  country 
well,  and  come  once  in  a  while  to  take  dinner  with  my  lackey. 
Yes'  yes,  the  single  tax,  it  is  a  glorious  thing."  This  Uttle 
picture,  perhaps,  did  more  than  all  else  to  nuUify  the  efforts  of 
the  Physiocrats.  .     i    x 

We  shall  later  discuss  the  effects  of  the  modern  smgle  tax 
on  the  farmer,  but  the  principle  underlying  Voltaire's  thought 
is  equally  appUcable  here.  On  what  grounds  of  morals  or  jus- 
tice shall  the  landowner  be  singled  out  for  taxation? 

We  have  seen  that  the  theory  of  natural  rights  is  not  adequate; 
we  have  learned  that  the  principle  of  opportunity  does  not 
correctly  portray  the  relations  of  the  individual  to  the  state. 
Even  if  the  theory  of  unearned  increment  were  true,  it  would 
not  by  any  means  justify  the  single  tax  on  land  values.  In  the 
first  place,  land  values  do  not  always  or  necessarily  increase; 
and,  secondly,  there  are  a  great  many  other  values  which  in- 
crease mainly  by  the  operation  of  forces  which  the  owner  of  the 
property  neither  creates  nor  controls. 

Land  values  do  not  always  or  necessarily  increase.  Thus,  in 
the  testimony  given  before  the  Rapid  Transit  Commission  in  the 
city  of  New  York  in  March,  1895,  one  of  the  witnesses  spoke 
of  several  long  avenues  being  fined  with  the  graves  of  property- 
owners.  What  did  he  mean?  Simply  that  ten,  or  twenty, 
or  thirty  years  before,  certain  individuals  had  invested  in  the 
land,  in  hope  of  a  rise  in  value,  just  as  people  invest  in  bonds  or 
stocks  or  other  securities.  Instead  of  values  rising,  however, 
they  remained  stationary  or  even  decreased;  while,  in  the  mean- 
time, the  accumulated  taxes  and  assessments  upon  this  non- 
productive property  completely  ruined  many  of  the  investors. 
It  is  indeed  true  that  in  most  growing  cities  land  values  in  cer- 
tain localities  will  increase;  but  it  is  equally  true  that  there  are 
always  sections  in  such  cities  where,  for  obvious  reasons,  land 
values  decrease.  These  facts  are  familiar  to  all  observers  in 
large  cities.  Moreover,  in  some  European  countries  the  rental 
value  of  the  land,  in  whole  sections,  is  less  to-day,  owing  to 
transatlantic  competition,  than  it  was  a  few  decades  ago.  The 
tax  on  land  value  would  in  such  cases  yield  only  a  precarious 
revenue. 


THE  SINGLE  TAX 


81 


More  important  still  is  the  fact  that  even  though  land  values 
often  increase,  similar  increase  in  value  is  not  by  any  means 
confined  to  land.  Let  us  ask  anyone  whose  mind  is  not  befogged 
by  the  mist  of  erroneous  enthusiasms:  Who  are  the  rich  men  of 
the  world  to-day?  How  has  by  far  the  greater  part  of  our  huge 
individual  fortunes  been  acquired?  Let  us  study  the  way  in 
which  men  have  become  miUionaires,  especially  in  the  United 
States.  The  usual  cause  is  some  fortuitous  conjuncture  of 
events,  some  chance  happening  due  to  no  one's  labor,  but  to  a 
turn  in  the  wheel  of  fortune — call  it  speculation,  call  it  luck, 
call  it  by  any  name  we  will.  How  have  most  of  the  fortunes  in 
Wall  Street  been  made?  Who  is  responsible  for  the  increased 
value  of  investments?  Who  can  say  that  the  successful  manager 
of  the  ring,  the  corner,  the  pool  and  the  trust  has  worked  out  his 
salvation  through  his  own  industry?  Land  speculation  is  only 
a  part  of  the  sum  total.  If  it  be  claimed  that  the  fortunate 
speculator  deserves  his  fortune  because  of  his  sagacity  and  fore- 
sight, why  deny  these  attributes,  at  least  in  part,  to  the  land- 
owner? It  can,  of  course,  not  be  denied  that  wealth  has  been 
acquired  by  thrift  and  industry;  but  it  remains  true  that  most 
of  the  very  large  fortunes  that  strike  the  common  observer  are 
due  to  these  incalculable  turns  in  the  wheel  of  fortune,  and 
that  the  so-called  unearned  increment  of  land  values  forms 
only  a  portion  of  these  total  gains. 

Value  is  a  social,  not  an  individual  phenomenon.     If  social 
environment  gives  a  value  to  bare  land,  the  same  social  environ- 
ment, by  increasing  the  demand  for  other  commodities,  may  at 
least  in  part  help  to  augment  their  value.    It  is  indeed  true  that 
if  we  contrast  land  with  concrete  commodities  that  can  be 
multiplied  at  will,  the  difference  seems  to  be  profound.     In- 
creased demand  may  lower,  not  increase,  the  price  of  the  latter 
by  reducing  cost  of  production.    But  what  the  single-taxers 
forget  is  that  property  consists  of,  and  income  is  derived  from, 
not  only  concrete   commodities,   but  services,   relations  and 
privileges  of  all  kinds,  ^  where  increased  demand,  outstripping 
any  corresponding  decrease  in  the  cost  per  unit  of  producing  a 
greater  supply,  is  primarily  responsible  for  the  increased  value 
A  newspaper  m  a  desert  is  worth  nothing;  a  newspaper  in  a  town 
IS  worth  something;  a  newspaper  in  a  city  is  worth  still  more. 
Ihe  newspaper  is  in  part  the  product  of  labor,  but  the  greater 
demand  increases  the  value.    A  milk-route  also  is  more  profit- 
^Seligman,  Pnndples  of  Economics,  5th  ed.  (1912),  §§  84   113, 


82 


ESSAYS  IN  TAXATION 


THE  SINGLE  TAX 


83 


lib 


h  ! 


I 


;  1 


able  in  a  city  than  in  a  village.  If  it  be  said  that  land  differs 
from  all  these  in  that  it  is  a  monopoly,  the  answer  is  irresistible 
that  if  there  is  any  one  thing  which  distinguishes  the  modern 
age,  it  is  the  development  of  economic  monopohes  of  all  kmds. 
So  important,  indeed,  have  these  become  that  modem  economic 
theory  has  been  compelled  to  supplement  the  old  doctrine  of 
value  which  was  based  on  the  assumption  of  free  competition 
by  a  newer  and  more  comprehensive  theory,  especially  applicable 
to  all  these  modern  forms  of  monopoly  price.  Many  of  these 
monopoly  profits  cannot  be  reached  by  a  tax  on  land  values. 

On  what  possible  theory  of  justice,  then,  shall  we  tax  the 
man  who  has  invested  $100,000  in  land  which  the  next  year 
appreciates  fifty  per  cent;  and,  on  the  other  hand,  exempt  the 
man  who  has  invested  $100,000  in  the  stock  of  the  Sugar 
Trust,  which  the  next  year  may  also  enhance  fifty  per  cent? 
Why  should  the  earnings  invested  in  land  be  taxed  and  the 
earnings  invested  in  any  corporate  security  be  wholly  untaxed? 
It  might,  indeed,  be  claimed  that  a  railway  stockholder  will 
be  affected  by  a  tax  on  the  land  owned  by  the  corporation:  but 
it  is  difficult  to  see  how  a  railway  bondholder  can  be  reached 
by  any  tax  on  land  values  except  in  so  far  as  the  ultimate 
security  for  his  debt  may  be  affected.    As  the  bonded  indebted- 
ness of  the  railways  to-day  far  exceeds  their  capital  stock,  it 
appears  that,  even  in  the  case  of  these  industries  whose  increas- 
ing values  are  largely  due  to  the  influence  of  the  community, 
the  majority  of  investors  would  scarcely  be  touched.     In  the 
great  mass  of  industries,  of  which  the  Sugar  Trust  is  an  example, 
where  the  land  owned  by  the  corporation  is  of  exceedingly  small 
consequence  as  compared  with  its  other  assets,  it  is  plain  that 
a  tax  on  land  values  would  not  reach  even  the  stockholders  or 
the  owners  proper.     Almost  every  industry,  moreover,  is  de- 
pendent for  its  increasing  profits  upon  the  development  of  the 
community,  that  is,  upon  the  increasing  demand  for  the  product. 
Land  rises  in  value  because  there  are  more  people  who  want  to 
occupy  that  land;  the  earnings  of  a  city  newspaper  increase 
chiefly  because  there  are  more  people  who  want  news.    In  each 
case  the  increased  returns  are  due  primarily  to  social  causes; 
and  while  a  larger  newspaper  indeed  costs  more  to  produce, 
while  more  land  does  not,  yet  so  far  as  actual  profits  are  con- 
cerned, the  distinction  between  them,  for  all  practical  purposes, 
■   is  one  only  of  degree,  not  of  kind.    To  confiscate  the  capital  in- 
I  vested  in  land  with  the  chance  of  the  land  either  falling  or  rising 


in  value,  while  exempting  absolutely  the  capital  invested  in 
corporate  or  industrial  securities,  is  but  a  travesty  of  justice. 
It  will  be  impossible  to  convince  the  common  people  that  so- 
called  unearned  increments  are  confined  to  land.  As  a  matter 
of  fact  the  '' unearned  increment"  of  land  is  only  one  instance  of 
a  far  larger  class. 

So  far  as  a  man  receives  special  opportunities  from  the  com- 
munity, which  undoubtedly  increase  his  ability  to  pay,  they 
should  be  taken  into  account  in  framing  any  scheme  of  taxation. 
And  since  the  rapid  growth  of  modern  towns  brings  into  strong 
relief  the  appreciation  of  site  values  which  are  due  primarily  to 
the  growth  of  the  community  itself,  it  is  not  only  justifiable  but 
eminently  desirable  that  a  part — and  a  large  part — of  the 
revenues  should  be  raised  from  a  tax  on  land  values.  But  let  us 
not  single  out  one  special  opportunity,  because  it  strikes  the 
eyes  of  urban  observers,  while  we  neglect  all  the  other  oppor- 
tunities which  are  equally,  or  almost  equally,  the  result  of  social 
forces.  While  some  kind  of  a  tax  on  land  values  is  a  legitimate 
part  of  a  tax  system,  the  single  tax  on  land  values  is  unjust; 
first,  because  opportunity  is  not  the  only  element  that  must  be 
taken  into  account  in  framing  a  tax  system;  and,  secondly, 
because,  even  though  it  were,  revenues  from  land  are  by  no 
means  the  only  form  of  the  results  of  special  opportunity.  The 
single  tax  is  unjust  because  it  is  exclusive  and  unequal. 

Even  though  the  single  tax,  however,  Avere  theoretically  just, 
it  would  not  follow  that  it  is  desirable.  Let  us,  therefore,  come 
to  the  final  part  of  our  inquiry. 

4.  Economic  Defects 

These  considerations  which  have  often  been  overlooked,  may 
be  discussed  from  three  points  of  view:  first,  the  economic 
effect  of  the  single  tax  on  poor  communities;  second,  the  eco- 
nomic effect  on  farmers  and  the  agricultural  interests  in  general; 
third,  th6  economic  effect  on  rich  communities. 

In  the  first  place,  what  would  be  the  effect  on  poor  communi- 
ties? 

In  such  cases  the  taxable  property  of  the  community  consists 
principally  of  the  often  dilapidated  farm  houses  erected  on  the 
land;  of  the  tools,  implements  and  beasts  of  burden  used  for  till- 
ing the  land;  and  of  the  personal  effects  and  money  that  belong 
to  the  farmers.  Even  making  due  allowance  for  the  relative 
poverty  of  the  community,  it  may  be  said  that  the  great  mass  of 


i  ' 


ill 


84 


ESSAYS  IN  TAXATION 


their  possessions,  therefore,  consists  of  personalty.  In  so  far  as 
there  is  any  real  property  at  all,  it  is  only  to  an  exceedingly 
slight  extent  composed  of  land  values.  How  then,  it  may  be 
asked,  can  taxes  be  raised  in  a  community  like  this?  How  can 
the  roads  be  maintained,  the  school  houses  be  kept  up,  and  the 
other  improvements  be  effected?  Since  land  values  are  in- 
significant, a  tax  imposed  on  an  insignificant  basis  must  be 
insignificant.  In  fact  it  may  be  said  that  a  total  confiscation  of 
the  land  values  would  not  suffice  to  defray  any  considerable 
part  of  the  necessary  expenditures.  If  we  take  any  of  the  assess- 
ors' reports  in  the  less  wealthy  and  not  rapidly  growing  American 
states,  it  will  be  found  that,  contrary  to  the  conditions  of  the 
rest  of  the  country,  the  assessed  personal  property  far  exceeds 
in  value  the  total  assessed  real  estate.  For  instance,  in  1890 
personalty  was  to  total  realty  in  Montana  as  58  to  55  millions 
of  dollars,  in  Wyoming  as  20  to  13  millions,  in  New  Mexico 
as  28  to  15  millions.  Compare  these  figures  with  the  older 
sections,  as  New  York  or  Pennsylvania,  where  the  proportion 
was  as  382  to  3,404  millions  and  618  to  2,042  millions  respec- 
tively.^ In  1904,  the  date  of  the  last  available  statistics,  the 
proportions  were  about  the  same.  Taxable  personalty  was  to 
realty  in  Montana  as  107  to  95  millions,  in  Wyoming  as  28  to 
18  millions,  in  New  Mexico  as  26  to  16  millions;  but  in  New 
York  as  686  to  7,051  millions  and  in  Pennsylvania  as  200  to 
3,476  millions.  The  estimated  true  values  were  as  follows: 
Montana,  as  418  to  328  millions;  Wyoming,  as  197  to  133 
millions;  New  Mexico,  as  177  to  154  millions;  New  York  as 
5,617  to  9,151  millions;  Pennsylvania,  as  4,882  to  6,593  millions.^ 
If  we  are  to  abolish  not  only  the  tax  on  personalty,  but  all  that 
part  of  the  tax  on  realty  which  is  not  drawn  from  land  values, 
it  can  easily  be  seen  how  difficult  it  would  be  to  carry  on  govern- 
ment in  these  sections. 

What  is  true  of  poor  communities  as  a  whole  applies  also  to 
the  poorer  sections  of  a  rich  community  constituted  largely  or 
almost  entirely  of  an  agricultural  population  •  which  is  not 
rapidly  increasing  in  numbers  or  wealth.  The  single-taxers 
themselves  claim  that  land  values  amount  to  practically  nothing 
in  the  farming  districts.  We  shall  see  below  the  fallacy  in  this 
general  contention;  but  so  far  as  the  community  is  a  poor  one 

» These  figures  are  taken  from  the  census  reports  of  1890.  See  Abstract 
of  the  Eleventh  Census:  1890  (1894),  p.  195. 

*  Census  Report:  Wealthy  Debt  and  Taxation,  1907. 


THE  SINGLE  TAX 


85 


there  is  undoubted  truth  in  the  statement  that  land  values  are 
trivial.  In  the  testimony  taken  before  a  recent  tax  commission 
of  Massachusetts,  one  of  the  single-taxers  who  was  testifying 
as  to  the  situation  in  certain  rural  townships  was  asked  the 
question:  How  will  it  be  possible  for  this  poor  town,  in  which 
there  is  very  little  land  value,  to  raise  its  taxes?  The  witness 
was  compelled  to  reply  that  it  would  be  impossible  for  the  com- 
munity to  do  so,  and  he  suggested  that  the  expenses  of  the 
poor  communities  should  be  defrayed  in  large  part  from  the 
revenues  of  the  rich  communities.-^ 

This  proposal  is  not  easy  of  accomplishment;  for  with  the 
American  theories  of  local  government,  it  would  be  diflicult  to 
induce  certain  sections  in  the  community  to  assume  the  burdens 
of  other  sections.     We  are  all  acquainted  with  the  continual 
bickerings  in  our  state  taxation,  due  to  the  efforts  of  the  richer 
counties  to  escape  paying  more  than  their  proportion  of  the 
general  state  taxes;  and  we  have  seen  the  discontent  aroused  in 
1894  by  the  attempt  in  the  shape  of  the  federal  income  tax  to 
make  certain  wealthy  sections  of  the  country  pay  a  dispropor- 
tionate part  of  the  revenue  of  the  national  government.    Where 
these  efforts  have  given  rise  to  so  much  dissatisfaction,  it  is  ob- 
viously improbable  that  the  purely  local  expenses  of  any  com- 
munity will  be  defrayed  by  the  efforts  of  other  communities. 
While  it  is  indeed  true  that  the  general  state  government  has— 
and  very  properly— in  recent  years  constructed  highways  and 
built  hospitals,  and  while  even  according  to  our  present  system 
school  taxes  levied  according  to  wealth  are  sometimes,  in  part 
at  least,  distributed  according  to  population,  this  tendency 
however  desirable  in  itself,  has  well-defined  limits.    To  a  very 
large  extent,  at  least,  it  will  probably  continue  to  be  true  that 
in  purely  local  matters  every  county  and  town  must  stand  on 
Its  own  feet.    But  if  the  single  tax  is  unable  to  defray  even  the 
local  expenses  of  a  poor  community,  not  to  speak  of  its  share  of 
general  state  or  federal  expenses,  it  is  clearly  beyond  the  realm 
ot  practical  politics.    In  poor  communities,  unless  rapidly  in- 
creasing m  population  and  resources,  the  single  tax  would  be 
a  somewhat  precarious  reliance. 

Let  as  consider,  next,  what  would  be  the  effects  of  the  single 
tax  on  farmers  m  general.    One  of  the  claims  of  the  advocates 

*C/.  Hearings  relating  to  Taxation,  1893   no  IRii-ISQ  ^r.ri  p«^    /    r  ,i. 
Mnt  Special  CommiUee  on  Taxation,  1894%  38  '  ^'  "^  '^ 


.  1 


86 


ESSAYS  IN  TAXATION 


THE  SINGLE   TAX 


87 


I 


I 


of  the  system  is  that  it  would  reUeve  the  farming  population  of 
the  burden  of  taxes  now  weighing  upon  them  A  careful  con- 
sideration  of  the  facts  shows,  however  that  this  claim  is  un- 
founded, and  that,  on  the  contrary,  the  result  of  the  sm^^^^ 
tax  would  be  to  make  the  farmers  pay  more  than  they  are  pay- 

'""^f  iy  a  few  states  is  a  distmction  made  in  the  assessments 
between  land  and  improvements  on  land  Let  us  take^^J  a 
typical  instance,  Ohio  county  in  West  Virgmia,  m  which  ^^e 
city  of  Wheeling  is  situated.  In  the  auditor's  report  for  1892, 
we  find  the  following  figures:  ^— 


Proportion 

_  o       „    Of"  Ohio 

Ohio  County  Entire  State    countt 

Per  cent 


Value  of  buildings  on  lots, 
Value  of  buildings  on  lands, 

Total  value  of  buildings, 

Value  of  town  lotswithout  build- 
ings. 

Value  of  land  without  buildings. 

Total  value  of  all  land  without 
buildings, 

Total  value  of  lands,  lots  and 
buildings, 

Value  of  personalty, 

Total  assessments, 

Population, 


$8,554,010 
671,795 


$22,840,511 
14,371,855 


$9,225,805  $37,212,366        25 


4,409,152 
1,678,962 


14,453,321 
95,771,281 


$6,088,114        $110,224,502  51^ 


15,313,919 

6,187,710 

21,501,629 

41,000 


147,685,972 

51,707,093 

198,959,920 

763,000 


lOVa 
12 

lOH 
5M 


In  other  words,  whereas  Ohio  county  then  paid  ten  and  one- 
half  per  cent  of  all  taxes,  and  would  have  paid  about  the  same 
ff    eal  estate  alone  were  taxed,  had  the  single  tax  been  intro 
duced  it  would  have  paid  only  five  and  one-ha^^F  per  cent  of  the 
total  taxes,  or  about  one-half  of  what  was  actual  y  the  case.    The 
corresponding  figures  for  1908  were  9.9  per  cent  on  total  valua- 
STper  cent  on  real  estate  alone,  and  6.8  per  cent  on  land 
values  alone.    If  the  large  towns  would  pay  so  much  less,  of 
course  the  farming  districts  would  have  to  pay  ««  ^ch  m^^^^^^^ 
The  improvements  in  the  towns  are  worth  more  than  the  value 
of  the  bare  land;  while  in  the  country  districts  the  reverse  is 
true. 

1  These  figures  are  subject  to  some  qualification  because  of  the  inclusion 
of  tLTalufof  oU  leases  in  the  personal  property.  But  the  corrections 
would  probably  not  suffice  to  alter  the  conclusion. 


As  another  example  let  us  take  California.     In  the  comp- 
troller's report  for  1893,  we  find  the  following  figures: — 


County 


Colusa, 

Merced, 

Tulare, 

San  Francisco, 

Total  state. 


Value  of  Real 
Estate 
(i.e.  bare  land) 

$10,649,318 

11,222,179 

17,258,512 

193,872,645 

757,980,207 


Value  of  Improve- 
ments ON  Real 
Estate 

$1,283,265 
1,037,103 
2,327,705 

82,584,775 
242,388,163 


Ratio  of  Land 

Values  to  Total 

Real  Estate 

Per  cent 

89 
92 
88 
70 
76 


We  thus  see  that  while  in  the  city  of  San  Francisco  improve- 
ments equalled  thirty  per  cent  of  the  total  real  estate  value,  in 
some  of  the  country  districts  improvements  were  only  ten  or 
fifteen  per  cent  of  the  total.  Taking  the  state  as  a  whole,  land 
values  equalled  seventy-six  per  cent  of  all  real  estate,  while  in 
San  Francisco  land  values  were  only  seventy  per  cent  of  all 
real  estate.  To  levy  the  single  tax  would,  therefore,  make  San 
Francisco  pay  less,  and  some  of  the  country  counties  far  more, 
than  at  present. 

Again,  let  us  call  attention  to  the  report  of  the  Commission 
on  Valuation,  made  in  1892  to  the  Pennsylvania  Tax  Conference, 
which  is  probably  the  most  careful  attempt  made  up  to  that  time 
to  distinguish  land  values  from  improvements.  We  find  the 
following  figures : — 

Value  of  Lano 

$357,007,936 


Philadelphia  county, 
Purely  agricultural  land  in 

Philadelphia  county. 
Entire  state,  all  land, 


Value  of  Improvements 
$646,244,284 


21,610,429 
1,881,334,522 


Entire  state,  agricultural  land,      725,485,439 


3,813,605 

1,754,525,949 

245,494,072 

The  proportion  of  land  values  to  total  valuation  of  all  prop- 
erty was  in  the  county  of  Philadelphia,  thirty-six  per  cent:  in 
the  agricultural  counties  of  Sullivan  and  Greene,  eighty-one 
P^^^'^i.f ^^  '^^^^*y-five  per  cent,  respectively;  and  in  the  whole 
state,  fifty-two  per  cent.  The  Commission  concludes:  "As  a 
rule,  in  agricultural  counties  the  land  values  are  the  greatest 
as  would  be  expected;  while  in  manufacturing  counties  and  those 
having  arge  cities,  the  value  of  the  improvements  is  equal  to 
that  of  the  land,  or  greater." 

Let  us  now  choose  some  Western  states.    In  the  report  of  the 
auditor  of  Colorado  for  1894  we  find  the  following  figures:- 


Iij! 


i. 


88  ESSAYS  IN  TAXATION 

Value  of  agricultural  and  grazing  land,  irrespec- 
tive of  improvements       .... 

Value  of  improvements 

Value  of  town  and  city  land,  irrespective  of  im- 
provements         

Value  of  improvements 


THE  SINGLE  TAX 


89 


$36,907,810 
7,492,022 

63,080,205 
34,788,941 


In  other  words,  in  the  towns  improvements  constituted  about 
one-third  of  the  total  values;  whereas  in  the  country,  improve- 
ments were  only  about  one-sixth  of  the  total. 

As  to  Montana  we  find,  in  the  report  of  the  Board  of  Equal- 
ization for  1894,  the  following  figures:— 


Value  of  city  and  town  lots     . 
Value  of  improvements  on  same 
Value  of  land    .... 
Value  of  improvements  on  same 


$29,362,754 
15,156,115 
17,493,680 

7,287,887 


In  Lewis  and  Clarke  county,  the  home  of  the  largest  city  in 
the  state,  the  total  value  of  all  land  was  $11,397,860;  that  of 
improvements,  $5,269,300.  In  some  of  the  agricultural  or 
grazing  counties,  however,  the  value  of  the  land  was  far  higher 
in  proportion  to  the  improvements;  in  Meagher  county,  for 
example,  land  was  $1,821,385,  while  improvements  were  only 
$629,054.  Most  striking  of  all,  ui  this  very  same  county, 
in  the  case  of  agricultural  property,  the  figures  were:  land 
$1,218,474,  improvements  $266,824;  while  in  the  town  lots  the 
figures  were:  bare  land  $602,911,  improvements  $362,375.  In 
other  words,  not  only  are  improvements  proportionately  less 
in  the  rural  counties,  but  even  in  these  rural  coimties  by  far  the 
larger  proportion  of  the  improvements  are  found  in  the  little 
to^\Tis,  as  compared  with  the  farming  or  grazing  land  proper. 

In  the  state  of  Washington,  the  State  Board  of  EquaUza- 
tion  agreed  on  the  following  figures  for  1893: — 


Value  of  land  exclusive  of  improvements 
Value  of  improvements  .... 
Value  of  city  and  town  lots    . 
Value  of  improvements  .... 


$  87,527,472 

8,970,908 

101,889,377 

29,585,930 


In  Utah,  Salt  Lake  county,  the  seat  of  the  chief  city,  assessed, 
in  1893,  real  estate,  exclusive  of  improvements,  at  $31,347,670; 


improvements,  at  $9,483,141.  In  rural  counties  like  Rich 
county  and  Cache  county,  the  figures  were,  in  the  one  case, 
realty  $527,666,  improvements  $81,445;  in  the  other  case, 
realty  $3,771,810,  improvements  $915,614.  Here  again,  the 
more  densely  settled  the  township,  the  greater  in  proportion 
is  the  value  of  the  improvements. 

To  choose  more  recent  figures,  the  North  Dakota  state  board 
of  equahzation  fixed  the  valuation  for  1910  as  follows: 

Land  values $146,654,672 

Improvements 9,909,143 

Town  or  city  lots 11,066,982 

Improvements 16,959,192 

Almost  equally  remarkable  figures  are  reported  for  Wyoming 
by  the  Commissioner  of  Taxation  for  1909-1910: — 

Land  values $40,029,518 

Improvements 6,338,712 

Town  lots 12,836,541 

Improvements 14,324,496 

The  same  is  true  in  the  Eastern  states.  Thus  in  New  Jersey, 
in  1911  in  certain  counties  the  land  values  were  greater  than 
the  value  of  the  improvements: — 


County 

Gloucester 

Somerset 

Salem 


Value  of  Land 

10,474,115 
9,863,204 
8,870,393 


Value  op  Improvements 

8,574,078 
7,868,530 
4,062,473 


While  in  the  cities  the  reverse  was  true.^ 


CiTT 

Camden 
Newark 


Value  op  Land 

$18,610,635 
$134,764,835 


Value  op  Improvements 

$  30,278,706 
150,144,175 


In  all  these  cases— and  they  might  be  multiplied— it  is 
seen  that  the  value  of  the  improvements  is,  on  the  whole, 

»  These  figures  were  fortunately  not  available  when  Mr.  Shearman  stated 
(Natural  Taxation,  ch.  12)  that  "in  no  large  city  are  buildings  worth  more 
than  50%  of  all  real  estate." 


ESSAYS  IN  TAXATION 


THE  SINGLE  TAX 


91 


i 


90 

dollars.    The  town  lot,  he  is  apt  to  e'' J'"^'  '^        ^^j  ^^^^^,^,_ 

with  agricultural  land  valuer,  we  ao  i 

"  "1:;  orLdlnTe  countfy;  but  it  must  be  remembered 
hTt'ere  '^e  many  thousand  t-es  as  -any  acr^  m  the 

S-L?  S^^^  -Xustd  I;i[ars?St  aMrm  of  five 
Lfdrr/L^s  rthe  country  may  al^  be  worth  ten  thous^d 
dollars,  exclusive  of  toP-^-^^rjI^^Jd  J^n  proce^ed  to 
^'"^  ''^Td'cuSa^  H  win  noTbeistd  when'the  assessor 

as  much  per  front  ^"«*.    f,?,!"'' ^^yK'Tt^^  thousand  dollars 
difference  to  h.m  whether  the  New  Yo^^^^^^  ^^^^^^^  ^^„^^^ 

Ll-taxS  Se^hi  S^s  i-h-ll^^^^^^^^^ 

i-te^f-  J^;S  tSfan^  1^^^  - 

acre  in  the  country  than  in  the  "^y'^VtiShrKer  than  the 

Irfb«Uo«  ./  ^'-"r'^rTrvtirL'Sn  o?S  "isUcs,  Misc.  Series, 
<io„.  U.  S.  Dcp'tm't  of  Agr'«"  t"^' D^™^°7^,u„bia  and  the  sixteen 
1900.  Thi.  cxamma  .on  'j"^;:;  «L*^;^,^X  The  conclusion  was  that  in 
states  which  assessea  land  Y'>«?,f^P"!l7„portionately  greater  in  rural 
a  majority  of  the  c«^  land  ^'^J?;;"  Sd  ,„d  commented  in  Max 

than  in  urban  ''f  "<='-,  J'>T:^^S'fri„"^S  Science  Quarterly,  vol.  14 
West   "City  and  Country  laxc&,     m  *  "t" 

(1899),  pp.  486-499. 


I 


country  will  form  a  substantial  part  of  the  whole.  Moreover, 
we  have  seen  that  the  value  of  improvements  is  relatively- 
greater  in  the  towns  than  in  the  country.^  In  the  country  the 
farmhouse  is  built  for  a  few  hundreds  or  thousands  of  dollars; 
in  the  city  the  fine  stone  mansion  or  steel  skyscraper  is  erected 
at  a  cost  of  hundreds  of  thousands  or  millions  of  dollars. 

If,  therefore,  all  improvements  were  to  be  entirely  exempted, 
the  result  of  a  tax  on  land  values  would  be  to  make  the  farmers 
pay  more  than  they  do  at  present.  It  is  not  denied  that  as  be- 
tween the  general  property  tax  as  actually  administered  and  a  tax 
on  real  estate  only,  the  farmer  would  be  benefited  by  the  adop- 
tion of  the  latter.  For  personal  property,  as  has  been  elsewhere 
explained, 2  is  assessed  chiefly  in  the  agricultural  communities. 
The  remedy,  however,  consists  not  in  taxing  land  values  alone, 
but  in  striving  to  reach  the  owners  of  personal  property  by  some 
other  method  than  that  of  the  general  property  tax.  But  even 
assuming  that  this  reform  cannot  be  effected,  what  the  farmers 
would  gain  by  the  aboUtion  of  the  personal  property  tax,  they 
would  lose  and  more  than  lose,  as  we  have  seen,  by.  the  total 
exemption  of  all  improvements.'^  As  long  as  the  United  States 
remains  pre-eminently  an  agricultural  community,  it  is  not 
likely  that  the  single  tax  will  become  a  practical  question.^ 

^  The  single-taxers  claim  that  much  of  the  present  value  of  farm  land — 
due  to  fencing,  draining,  etc. — should  be  classed  as  improvements.  But,  as 
we  have  pointed  out  above,  it  is  quite  impossible  in  practice  to  distinguish 
improvements  on  the  land  from  improvements  in  the  land.  No  attempt 
is  ever  made,  in  assessing  land  values,  to  differentiate  between  the  tw^o. 

2  Supra,  p.  18. 

'  This  conclusion  is  confirmed  by  Dr.  West,  after  analyzing  the  official 
statistics,  in  the  article  cited  on  the  previous  page,  in  which  he  also  states 
that  "the  exemption  of  intangible  personalty  alone  would  in  a  majority  of 
cases  relieve  urban  communities  at  the  expense  of  rural  districts;  but  that 
the  exemption  of  both  tangible  and  intangible  personalty  would  benefit  the 
rural  districts  in  three-quarters  of  the  commonwealths." 

*  In  a  pamphlet  entitled  Peoples  Power  and  Pvblic  Taxation,  written  by 
A.  D.  Cridge  and  W.  S.  Uren,  published  by  the  Fels  fund  and  distributed 
in  1910  to  every  voter  in  Oregon,  some  remarkable  figures  are  presented 
as  to  the  effect  of  the  adoption  of  a  land-value  tax  in  lowering  farmers' 
taxes.  The  figures  are  worthless  because  of  the  naive  assumption  that  the 
naked  land  value  of  tillable  lands  (those  actually  in  cultivation)  is  no 
greater  than  that  of  the  non-tillable  lands.  In  other  words,  if  a  piece  of 
good  land  is  cleared,  its  naked  land  value,  according  to  this  view,  would 
be  no  greater  than  that  of  an  adjoining  rocky  hillside  which  is  not  put 
under  cultivation  because  it  would  not  be  worth  while.  It  is  such  argu- 
ments that  are  spread  broadcast  to  the  general  public! 


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93 


Thirdly,  and  finally,  let  us  consider  the  economic  effects  of 
the  single  tax  on  rich  urban  communities. 

It  is  contended  by  the  single-taxers,  with  special  reference 
to  the  advantages  claimed  as  likely  to  accrue  to  the  tenement- 
house  population  of  the  large  cities,  that  the  introduction  of 
their  system  would  bring  about  the  social  millennium.  It  is 
supposed  that  if  we  abolish  the  tax  on  improvements,  that  is, 
on  houses,  the  vacant  lots  will  be  built  over  as  if  by  magic, 
rents  will  fall,  the  wages  of  the  workmen  will  rise,  and  a  period 
of  general  prosperity  will  be  ushered  in. 

It  may  be  asked,  in  the  first  place,  where  all  this  additional 
capital  which  is  to  be  invested  in  houses  is  coming  from.  There 
is  no  fund  floating  about  in  the  air  which  can  be  brought  to 
earth  simply  by  the  imposition  of  the  single  tax;  the  amounts 
to  be  laid  out  in  houses  must  be  taken  from  the  capital  now 
invested  in  some  other  form  of  productive  enterprise.  The 
amount  of  loanable  capital  in  the  money  market  at  any  one 
time  is  definitely  fixed.  Even  deposits  in  banks  are  already 
invested,  for  the  most  part,  in  mortgages  or  in  corporate  se- 
curities; that  is,  they  are  already  utilized  for  productive  pur- 
poses. What  is  put  into  new  houses  will,  therefore,  simply  be 
so  much  taken  away  from  other  productive  employments. 

It  may  be  asked  next,  how  are  the  rents  of  our  tenement- 
house  population  so  suddenly  to  fall?  The  theory  that  a  tax  on 
houses  is  shifted  to  the  consumer  or  tenant  is  true  enough, 
provided  that  the  tax  be  exclusive — that  is,  provided  that  noth- 
ing be  taxed  except  houses.  If,  on  the  contrary,  the  house 
tax  is  simply  a  part  of  a  wider  system  of  taxation;  if  other 
forms  of  property  are  assessed,  like  investments  in  land  and  in 
personal  property;  if  a  corporation  tax  is  imposed  to  hit  the 
investors  in  corporate  securities;  or  if  we  have  an  income  tax 
which  is  to  reach  general  profits, — in  all  these  cases  the  very 
conditions  of  the  theory  according  to  which  a  house  tax  is 
shifted  disappear.^  To  the  extent,  then,  that  the  house  tax  is 
not  a  single  tax,  the  tendency  for  it  to  be  shifted  will  be  di- 
minished. The  only  result,  in  this  direction,  of  the  single  tax 
would  be,  as  a  matter  of  fact,  that  people  would  pay  their 
rent  to  the  state  instead  of  to  private  individuals.  We  hear  a 
great  deal  about  the  unoccupied  lands  held  for  speculative 
purposes  in  large  cities;  but  it  is  a  fact  that  south  of  Fourteenth 
Street  in  the  city  of  New  York— the  home  of  the  major  part 
>  See  The  Shifting  and  Incidence  of  Taxation  (3d  ed.),  pp.  -^2,  293. 


of  the  tenement-house  population — ^not  seven-tenths  of  one  per 
cent  of  the  building  lots  lie  idle,  and  of  these  some  lots  are 
occupied  as  coal  yards,  and  some  adjoining  factories  or  large 
establishments  are  used  for  storage  purposes.^  How  then 
would  the  single  tax  relieve  the  inhabitants  of  the  slums?  They 
will  not  go  to  the  suburbs  where  there  is  an  abundance  of  land, 
for  the  same  reason  that  they  do  not  go  there  now.  Rent  in 
the  suburbs  is  at  present  relatively  less  than  in  the  slums, 
which  are  nevertheless  crowded.  The  average  workman  plainly 
prefers  to  be  near  his  work,  and  to  enjoy  the  social  opportuni- 
ties of  contact  with  his  fellow-workmen,  evenings  as  well  as 
daytime.  Above  all,  without  cheap  and  rapid  transit,  he  can- 
not afford  the  expenditure  of  time  and  money,  necessary  for 
conveying  the  various  members  of  his  family  to  and  from  the 
suburbs.  The  single  tax,  however,  would  not  alter  conditions 
of  transit.  Even  assuming,  therefore,  that  there  was  some 
magic  fund  to  cover  the  suburban  lots  with  houses,  the  rents  in 
the  slums  would  not  be  affected  to  any  appreciable  degree. 

Somewhat  akin  to  this  is  the  question  of  exempting  improve- 
ments from  the  local  tax  on  real  estate,  as  a  part  of  the  whole 
scheme  of  taxation.  Even  here,  however,  it  is  scarcely  open 
to  doubt  that  the  claims  made  by  its  defenders  as  a  cure  for 
urban  congestion  of  population  are  greatly  exaggerated.^  In 
small  towns  where  it  is  customary  for  the  owner  of  the  land 
also  to  own  the  buildings,  it  makes  indeed,  very  little  difference 
whether  the  tax  is  imposed  in  a  lump  sum  on  both  land  and 
buildings,  or  whether  the  same  amount  is  paid  by  the  owner  on 
his  land  with  the  buildings  exempted.  The  chief  difference  is 
to  be  found  in  the  larger  cities,  where  there  is  a  variation  in  the 
proportion  of  the  value  of  the  structure  to. that  of  the  land. 
Where  the  building  value  is  sixty  per  cent  of  the  total,  as  in  the 
suburbs  of  a  large  city,  compared  with  forty  and  thirty-five 
per  cent  in  the  crowded  districts,  it  might  seem  that  a  remission 
of  the  tax  on  improvements  would  tend  to  foster  the  construction 
of  buildings  in  the  suburbs  and  thus  to  reduce  rents  all  around 
and  in  this  way  lessen  congestion.    But  entirely  apart  from  the 

9 

*  In  1911  there  were  south  of  Fourteenth  street  in  New  York  467  vacant 
lots,  with  a  value  of  $9,844,910  out  of  a  total  number  of  24,203  parcels  of  real 
estate  with  an  assessed  valuation  of  $1,319,866,666.  See  the  Report  of  the 
Commissioners  of  Taxes  and  Assessments  for  1911. 

2  See  especially  Taxation  of  Land  Values  in  American  Cities,  The  Next 
Step  in  Exterminating  Poverty.    By  Benjamin  C.  Marsh,  New  York,  1911. 


t%4 

41  3t 


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THE  SINGLE  TAX 


96 


considerations  adduced  in  the  last  paragraph  as  to  the  relative 
inelasticity  of  rents  in  the  slums,  it  may  be  pomted  out  that  if 
improvements  are  wholly  exempt  the  tendency  would  obviously 
be  for  landowners  in  the  crowded  slums  to  erect  still  higher  tene- 
ments which  would  have  to  return  only  the  interest  on  the  less- 
ened investment,  and  which  would  therefore  again  increase 
congestion.  In  point  of  fact,  suitable  transportation  facihties, 
proper  housing  and  building  laws,  and  adequate  credit  condi- 
tions exert  a  far  more  imiwrtant  influence  on  congestion  and 
house  rents  than  does  any  system  of  exemption  of  improvements 

from  taxation.  ,11        i      +  + 

The  exemption  of  improvements  from  the  local  real  estate 
tax  has  been  tried  especially  in  Australasia  and  in  Canada. 
In  Australasia  the  results  are  inconclusive,  and  the  real  unpor- 
tance  of  the  reform  lies  not  so  much  in  the  exemption  of  improve- 
ments as  in  the  substitution  of  capital  values  for  rental  values 
in  the  assessment  of  Jand.  '    In  Canada  several  cities  and  prov- 
inces have  in  recent  years  exempted  V)Uildmgs  in  whole  or  in 
part,  from  the  real  estate  tax.'-    The  advantages  of  the  system, 
however,  have  not  been  those  advanced  by  its  advocates.    In 
Winnipeg  and  Vancouver,  for  instance,  house  rents  have  not 
fallen,  but  risen;  and  speculation  at  large,  far  from  being  abated, 
has  increased  enormously.    This  is,  of  course,  due  to  the  fact 
that  taxation,  even  as  a  whole,  is  of  incomparably  less  importance 
than  the  economic  forces  which  make  for  the  gro^vth  of  the 
community.    But  it  is  quite  idle  to  speculate  upon  what  the 
result  would  have  been  if  the  improvements  had  been  taxed; 
we  are  told  that  little  difference  can  be  noted  between  the 
Canadian  towns   wliere   improvements  are   exempt   and  the 
American  towns  across  the  border,  where  they  are  taxed. 
The  true  reason  why  there  has  been  so  little  opposition  to  the 
exemption  of  improvements  in  Canada  is  that  the  tax  rate,  in 
the  face  of  an  enormous  increase  of  land  values  which  is  nat- 
urally found  in  all  rapidly  growing  communities,  has  been 
kept  very  low.    Joined  to  this  is  the  sentiment  against  absentee 

»  For  a  discussion  of  this  cf.  infra,  p.  530. 

» For  a  full  and  accurate  statement  of  all  the  facts  of  the  case  see  chap, 
viii  of  Provincial  and  Load  Taxation  in  Canada,  by  S.  Vineberg,  New 
York,  1912.   This  is  no.  128  of  the  Columbia  University  Series  m  History, 

Economics  and  Public  Law.  „      ,        .     rr 

3  See  especially  F.  C.  Wade,  The  Sivrjh  Tax  Humhiig  in  Vancouver. 
Vancouver,  1912.  Wade  contends  tl.at  the  .ither  Canadian  "non-smgle- 
tax  "  cities  have  increased  still  faster  than  Vancouver. 


ownership,  which  is  often  apt  to  be  strong  in  any  young  com- 
munity, as  is  evidenced  by  similar  movements  toward  the 
exemption  of  improvements  that  are  found  in  the  early  history 
of  prosperous  American  states.^  The  situation  in  Canada  is  the 
same  as  that  in  Australasia.^  As  soon  as  the  normal  conditions 
of  a  long  estabUshed  community  present  themselves,  with  only 
a  gradual  and  moderate  increase  of  prosperity,  but  with  the 
rapidly  growing  expenditure  of  a  complicated  economic  life,  the 
real  problem  will  present  itself,  as  it  is,  for  instance,  found  in 
the  cities  of  the  Eastern  United  States. 

So  far  as  it  is  true  that  land  in  or  near  cities  is  held  largely  for 
speculative  purposes,  the  difficulty  can  be  met  by  the  enforce- 
ment of  now  existing  laws,  and  by  the  imposition  of  a  special  or 
a  higher  tax  on  unoccupied  lands  in  or  near  the  city.  The  tax 
laws  of  the  American  states  everywhere  instruct  the  officials 
to  assess  property  at  its  true  or  selling  value,  but  it  is  notorious 
that  unimproved  lots  are,  as  a  rule,  considerably  undervalued 
as  compared  with  those  on  which  improvements  have  been 
erected.  If,  then,  we  simply  enforce  the  laws  as  they  exist,  it 
will  be  more  difficult  for  anyone  to  hold  land  too  long  on  specu- 
lation. If  in  addition  we  impose  a  special  tax  or  a  higher  tax 
on  unimproved  city  lots,  it  will  be  still  more  difficult  to  do  so. 
It  is  thus  evident  that  the  desired  end  may  be  accomplished 
without  invoking  the  aid  of  the  single  tax. 

^  In  the  territorial  days  of  Iowa,  for  instance,  improvements  were  ex- 
empted for  a  time  in  1840,  and  a  few  years  later  an  important  discussion 
took  place  in  which  the  disadvantages  of  the  unearned  increment  accruing 
to  non-settlers  and  especially  to  absentee  speculators  were  fully  set  forth, 
with  reflections  on  the  dangers  of  land  monopoly.  As  the  country  was 
built  up,  however,  absentee  ownership  diminished  in  its  relative  impor- 
tance and  the  demand  for  the  exemption  of  improvements  disappeared. 
Cf.  J.  E.  Brindley,  History  of  Taxation  in  loiva,  1911,  i.,  pp.  23-28,  and 
the  interesting  editorials  from  contemporary  newspapers,  pp.  370-371. 

Still  further  back,  namely  in  the  seventeenth  century  we  find  a  similar 
movement  although  for  somewhat  different  reasons.  In  1652  Director 
Stuyvesant  of  New  Amsterdam  proposed  a  tax  on  unimproved  lands  only. 
The  bill  was  drawn  and  would  have  passed  but  for  the  necessity  of  a  larger 
revenue  from  more  general  sources,  due  to  the  war  between  Holland  and 
England.  See  O'Callaghan,  Laws  and  Ordinances  of  New  Netherlands, 
1638-1674,  sub  anno.  Two  years  later  it  was  proposed  that  vacant  lots 
in  New  Amsterdam,  Beverwyck  and  other  towns,  which  had  been  granted 
for  building  purposes,  should  be  sold  at  an  official  valuation  "  in  case  the 
present  owners  and  proprietors  either  neglect  or  are  disinclined  to  build 
on  aforesaid  vacant  lots."    Ibid.,  p.  181. 

2  Cf.  infra,  chap,  xvii,  sec.  vi. 


!| 


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'I' 


Furthermore,  so  far  as  the  idea  of  unearned  increment  is 
really  applicable  to  urban  real  estate,  the  problem  can  be  solved 
not  only  by  extending  the  American  system  of  special  assess- 
ments which  takes  for  public  purposes,  and  precisely  at  the  time 
of  its  creation,  the  increased  value  which  may  properly  be  said 
to  be  due  to  any  positive  action  on  the  part  of  the  community; 
but  also  by  imposing  an  additional  increment-value  tax,  which 
will  take  for  the  community  a  part  of  the  increased  value 
caused  by  the  silent  growth  of  the  community  itself.^  By 
enforcing  the  tax  laws  as  they  exist  to-day,  by  extending  the 
law  of  special  assessments  to  all  the  cases  which  are  properly 
referable  to  the  principle  of  benefits,  by  levying  a  special  tax  on 
unbuilt  city  lots  and  by  adding  to  the  existing  code  of  taxation 
some  form  of  increment-value  land  taxes,  we  shall  in  all 
probability  do  as  much  as  is  under  existing  conditions  either 
practicable  or  equitable. 

IV.  Conclusions 

We  have  studied  the  single  tax  from  different  points  of  view. 
It  is  undoubtedly  true  that  the  single-tax  agitation  has  been  of 
great  value.  It  has  in  some  countries  served  to  direct  attention 
to  the  abuses  of  a  mediaeval  land  system.  It  has  in  the  United 
States  helped  to  disclose  the  shortcomings  of  the  antiquated 
general  property  tax.  It  has  everywhere  done  yeoman's  service 
in  emphasizing  the  question  of  unjust  privilege.  But  none  the 
less  we  have  found  ourselves  unable  to  accept  its  demands. 
We  have  seen  that  the  single  tax  is  defective  fiscally,  politically, 
morally  and  economically.  We  have  learned,  first,  that  it  would 
be  inelastic,  and  that  it  would  intensify  the  inequalities  resulting 
from  unjust  assessments;  secondly,  that  although  itself  pro- 
posed chiefly  from  social  considerations  it  would  prevent  the 
government  from  utilizing  the  taxing  power  for  other  social 
purposes,  and  that  it  would  divorce  the  interests  of  the  people 
from  those  of  the  government;  thirdly,  that  it  would  offend 
against  the  canons  of  universality  and  equality  of  taxation, 
and  that  it  would  seriously  exaggerate  the  difference  between 
profits  from  land  and  profits  from  other  sources;  and  finally, 
that  it  would  be  entirely  inadequate  in  poor  communities, 
that  it  would  generally  have  an  injurious  influence  on  the 
farmer,  and  that  even  in  the  large  urban  centres  it  would  ex- 

1  As  to  this  cf.  infra,  pp.  491  et  seq.,  508  et  seq. 


empt  large  sections  of  the  population  without  bringing  any 
substantial  relief  to  the  poorer  classes. 

This  is  clearly  not  the  place  to  discuss  the  wider  claim  of  the 
single-taxers,  that  the  application  of  their  scheme  would  intro- 
duce the  social  millennium.  Even  as  a  method  of  tax  reform, 
however,  the  project  is,  as  we  have  seen,  a  mistaken  one.  Our 
system  of  taxation  is  far  from  being  ideal,  or  even  comparatively 
just.  But  whatever  be  the  much  needed  reform  and  however 
desirable  may  be  the  addition  of  a  tax  on  land  values  to  existing 
revenue  systems,  it  is  not  probable  that  either  the  common 
people  or  the  student  will  accept  a  scheme  which  is  at  bot- 
tom palpably  unjust,  which  abandons  one  of  the  fundamental 
theories  of  modem  taxation — that  of  relative  ability  or  faculty — 
and  which  seeks  to  put  the  burdens  of  the  many  on  the 
shoulders  of  the  few. 

Note  to  9th  ed.  The  Single  Tax  movement  suffered  a  notable  diminu- 
tion during  the  second  decade  of  this  century.  This  is  due  primarily  to 
the  fiscal  necessities  of  the  Great  War  and  to  the  recent  development  of  the 
income  tax,  with  its  broader  basis  for  taxation.  It  is  also  due  in  part  to 
the  reaction  which  followed  the  attempts  to  exempt  improvements  from 
taxation  in  the  Canadian  localities.  A  bequest  from  an  enthusiastic  single 
taxer  has,  however,  provided  funds  for  keeping  up  a  periodic,  but  unsuccess- 
ful, contest  in  some  of  the  American  states.  The  California  discussion  of 
1917  is  responsible  for  C.  C.  Plehn,  For  and  Against  the  Single  Tax,  1917, 
in  which  the  arguments  on  both  sides  are  set  forth.  An  interesting  argu- 
ment to  support  the  view  that  the  expectation  of  the  unearned  increment 
has  played  an  important  part  in  the  economic  development  of  the  United 
States  will  be  found  in  A.  S.  Johnson,  "The  Case  against  the  Single  Tax," 
Atlantic  Monthly,  Jan.,  1914,  p.  27.  For  an  historical  account  of  the  move- 
ment see  A.  L.  Young,  The  History  of  the  Single  Tax  Movement  in  the  United 
States,  1916,  and  the  Single  Tax  Year  Book,  ed.  by  Joseph  Dana  Miller,  New 
York,  1917. 


DOUBLE  TAXATION 


99 


.'i 
.1- 


l! 


lit 


CHAPTER  IV 


DOUBLE  TAXATION 


Double  taxation  in  the  simplest  sense  denotes  the  taxation 
of  the  same  person  or  the  same  thing  twice  over.^    This  is  at 
once  a  very  old  and  a  very  new  phenomenon.    It  is  very  old  so 
far  as  it  is  founded  on  mere  extortion,  on  the  caprice  of  govern- 
ment and  on  the  desire  to  raise  revenues  without  any  regard  to 
the  relative  burden  on  the  taxpayer.    All  government  was  at 
first  based  on  might.    Although  this  was  the  original  cause  of  the 
double  taxation  of  one  man  and  the  exemption  of  his  neighbor, 
it  is  in  modem  times  entirely  overshadowed  by  the  second  cause, 
which  is  essentially  of  recent  growth.     We  live  m  an  age  of 
industrial   complexity  and  differentiation.     In  former  times 
property  rights  were  simple,  and  the  little  capital  that  existed 
was  largely  owned  by  the  producer.    To-day  not  only  does  the 
same  capitalist  invest  in  different  enterprises,  not  only  is  the 
producer  often  dependent  for  a  part  of  his  capital  on  sums  that 
belong  to  others,  but  the  old  geographical  unity  has  been  dis- 
solved, and  there  is  no  necessary  connection  between  the  residence 
1  Cf  F  Walker,  Double  Taxation  in  the  United  States,  in  the  Columbia 
StudL,  vol.  v.,  no.  1  (1895);  T.  Sutro,  "Double  and  Multiple  Taxation 
in  Proceedings  of  the  Second  International  Tax  Conference,  1909,  p.  547, 
C    Crocker,  "Some  Judicial  Opinions  against  Double  Taxation     in  the 
Fourth  Conferene,  1911,  p.  264;  and  "Report  of  the  Committee  on  Double 
Taxation  and  Situs  for  the  Purposes  of  Taxation"  in  the  Ninth  Conference, 
1915  p  358.     For  the  earlier  literature  see  A.  L.  Perry,  Extra-temlonal  1  ax- 
atiori  Boston,  1875;  G.  G.  Crocker,  An  Exposition  of  the  DoMe  Taxation 
of  Pirsonal  Proi>erty  in  Massachusetts,  Boston,   1885;  and  ^e  Injustice 
and  Inexpedierwy  of  Double  Taxation,  Boston,  1892;  J.  C.  Ropes,  Double 
Taxation,  Cambridge,  1884;  J.  P.  Quincy,  Double  Taxation  m  Massachusetts, 
Boston,  1889;  R.  H.  Dana,  Double  Taxation  unjust  and  inexpedient,  Boston, 
IS92:  and  Double  Taxation  in  Massachusetts,  Boston  (1895). 

For  the  foreign  hterature  see  M.  J.  Brincour,  Des  doubles  impositions 
nscales  au  mnt  de  vue  national  et  au  point  de  vue  int^rnatwiml  Louvam 
(1910)-  Lieppert,  F.,  Das  intemationale  Finamrecht,  Yienna,  1912;  ana  the 
recent  comprehensive  work  by  G.  Fasolis,  Le  dopjne  imposizioni,CiitR  di 
Castello,  1914.  Cf.  also  numerous  articles  by  Lehr,  yon  Bar  and  Woms, 
in  the  Reirue  de  drsnt  international  et  de  IvgisUilion  comparee  from  1889  to  lyud, 
esoocially  the  volumes  for  1889,  1891,  1897,  1900,  1901  and  1903. 

QR 


of  the  capitalist  and  the  place  where  his  capital  is  employed. 
A  system  of  taxation,  therefore,  which  may  have  been  per- 
fectly just  under  the  older  and  simpler  conditions,  may  now  be 
entirely  inadequate  because  of  the  failure  of  government  to  take 
account  of  these  new  complications  in  property  rights.  As  a 
matter  of  fact,  almost  all  existing  double  taxation  in  civilized 
nations  is  due  to  inattention  to  these  modern  industrial  intri- 
cacies. 

If  we  approach  the  subject  of  double  taxation  more  closely, 
we  are  confronted  by  serious  difficulties.  There  are  almost 
as  many  kinds  of  duplicate  taxation  as  there  are  kinds  of  taxes 
or  of  industrial  relations.  We  find  the  term  used  with  the 
utmost  looseness,  so  that  what  may  be  in  one  state  a  very  im- 
portant species  of  double  taxation  may  be  quite  insignificant 
in  another.  In  the  first  state,  then,  the  phrase  ''double  taxa- 
tion" always  calls  up  a  particular  set  of  problems;  while  in  the 
other  state  the  same  phrase  will  denote  something  entirely  differ- 
ent. Let  us  therefore  endeavor  to  give  an  analysis  of  the 
phenomena  which,  while  not  entering  into  the  details  of  the 
problem,  will  explain  the  principle  in  all  states. 

There  are  two  distinct  categories  of  double  taxation — that 
by  competing  jurisdictions  or  authorities,  and  that  by  the  same 
jurisdiction  or  authority.  The  first  is  essentially  geographical 
in  character.  It  is  partly  due  to  the  fact  that  modem  wealth 
is  more  or  less  cosmopolitan.  A  man  living  in  one  state  and 
owning  property  in  another  may  be  taxed  on  the  same  property 
by  both  states,  because  they  compete  with  each  other  in  claim- 
ing jurisdiction  over  that  property.  Not  only  is  this  true  as 
between  foreign  countries,  but  it  is  equally  true,  and  in  fact  of  far 
greater  importance,  as  between  conflicting  authorities  in  the 
same  country.  The  separate  commonwealths  in  a  federal 
state,  the  separate  counties  in  a  commonwealth,  the  separate 
towns  in  a  county — each  and  all  of  them  may  make  conflicting 
claims  on  the  same  individual  or  on  the  same  piece  of  property. 
Double  taxation — or  it  may  be  triple  or  quadruple  taxation — by 
competing  jurisdictions  is  thus  a  product  of  the  modern  mo- 
bility of  capital  and  labor;  and  with  the  growing  importance  of 
local  taxation,  the  difficulties  are  multiplied. 

It  may  happen,  however,  that  a  single  authority— the  same 
town,  county,  commonwealth  or  nation — is  confronted  by 
essentially  similar  difficulties  as  to  property  or  persons  wdthin 
its  jurisdiction.    Thus  a  man  buys  a  piece  of  land,  and  borrows 


100  ESSAYS  IN  TAXATION 

part  of  the  purchase  price  from  another  man  living  in  the  same 
torn.  If  the  town  taxes  the  value  of  the  land  which  m  this 
S^includes  the  value  of  the  mortgage,  and  then  taxes  the 
mortgage  the  question  of  double  taxation  immediately  presents 
hS  1^,  agahi,  if  a  man  invests  his  property  m  the  stock  of  a 
Sporation  doing  business  in  the  same  place  while  the  stat^ 
taxS  boihthe  investor  and  the  corporation,  we  are  confronted 
by  the  same  difficulty.  In  such  ca.ses  the  taxes  are  imposed 
by  the  same  authority  or  jurisdiction.  Let  us  discuss  each 
class  in  turn. 

I.  Double  Taxation  by  the  Sajne  Authority 
The  simplest  case  arises  when  a  person  is  taxed  on  his  prop- 
erty income  or  profits,  while  an  additional  tax  is  imposed  on 
•  the  p  o^rty,  income  or  profits  of  the  business  m  which  he  is  a 
Ser  This  clearly  is  permissible  only  where  a  genera  tax 
ofbutines  iflevied  L  an  impersonal  tax  or  a  tax  on  the  thmg 
Sie  bSnessl  side  by  side  with  the  personal  tax  on  the  mdividual 

^Thf  first  important  instance  of  double  taxation  arises  when 
an  atmpt  "made  to  tax  property  and  also  to  tax  mcome^^ 
to  tax  either  property  or  income,  and  also  to  levy  a  busmess 
to  tax  eiiner  p  op     y  .^  ^^^^  misconception. 

Many  cons  de;  tSs  to  te  wrong,  because  it  is  double  taxation. 
As  a  matter  of  fact,  however,  if  all  are  put  upon  the  same 
^ane  ^he  lii^ultan^us  taxation  of  property  and  of  mcome 
S  no  injustice.    If  all  the  members  of  the  class  are   reated 
ZtT  iTmakes  no  difference  whether  there  is  one  single  high 
tx  on  proX  or  a  low  tax  on  property  and  another  ow  tax 
tnZ  Ss  o   the  property.    In  fact,  the  government  would 
be  SecTly  justified  in  taxing  the  property,  the  income  of  the 
nroSy  2^d  also  the  expenses  or  any  other  attribute  of  the 
nroSv    M  such  duplicate  or  triplicate  taxes  are  perfectly  rea- 
LnaWe  soTong  as  they  fall  equally  on  all     Taken  together, 
Zv  amount  simply  to  a  high  rate  for  a  single  tax  on  the  prop- 
erty   Zuble  taxation,  therefore,  is  not  a  ways  wrong;  it  ^ 
unfust  onlv  when  one  taxpayer  is  assessed  twice  while  another  m 
substantially  the  same  class  is  assessed  but  once.    K  is  the 
inwiuality  of  taxation  that  instinctively  shocks  us     But  if  all 
i3ns  4hin  the  class  are  equally  subjected  to  the  burden, 

^Irry't^TbjSTh^pU  are  not  treated  alike  when 


DOUBLE  TAXATION 


101 


they  pay  different  taxes  on  the  same  income.  Our  opinion 
must  depend,  however,  entirely  on  the  attitude  we  take  toward 
what  is  called  'differentiation"  of  taxation.  If  we  maintain 
that  all  incomes  should  be  taxed  alike,  irrespective  of  source,  the 
objection  would  be  valid.  But  modern  theory  has  formulated 
the  demand  for  a  distinction  between  earned  and  unearned 
incomes,  or  between  incomes  from  labor  and  incomes  from 
property.  Even  so  conservative  a  writer  as  John  Stuart  Mill 
was  an  adherent  to  this  principle,  which  is  at  present  quite 
generally  admitted.  This  ''differentiation"  may  be  secured  in 
two  ways.  A  lower  rate  may  be  levied  on  labor  incomes  than 
on  property  incomes,  as  in  the  present  North  Carolina  or  North 
Dakota  income  tax,  and  as  in  Great  Britain,  in  Italy,  in  Holland 
and  in  some  of  the  Australian  states.  But  instead  of  making  a 
difference  in  the  rates,  the  same  result  may  be  reached  by 
levying  a  uniform  tax  on  all  incomes  and  an  additional  tax 
on  property,  so  that  the  income  from  property  thus  indirectly 
pays  a  higher  rate.  This  was  the  case  in  Prussia  and  is  still 
found  in  some  of  the  Swiss  cantons,  where  the  property  tax  and 
the  income  tax  are  levied  on  the  same  property.  In  other  words, 
property  income  is  put  into  a  different  class  from  labor  income. 
It  is  taxed  twice — once  on  property  and  once  on  income — 
because  the  seeming  inequality  is  considered  to  be  really  a 
higher  equality.  It  is  double  taxation,  but  it  is  not  unjust  double 
taxation. 

In  some  places  the  principle  of  differentiation  has  not  yet 
been  adopted.  When  the  income  tax  is  added  to  the  property 
tax,  the  income  from  property  already  taxed  is  exempted,  as  in 
Massachusetts  and  in  some  of  the  Swiss  cantons.  Many  difficul- 
ties have,  however,  arisen  in  the  endeavor  to  distinguish  these 
property  incomes.  Thus  in  Massachusetts  the  question  pre- 
sented itself  whether  the  uicome  from  a  business  could  be  taxed, 
if  the  property  invested  in  the  business  was  already  taxed.  In 
a  leading  case  this  practice  was  upheld  on  the  ground  that 
business  profits  are  the  result  not  only  of  the  capital  invested, 
but  of  the  industry  and  skill  of  the  capitalist.^  Although  this 
is  no  doubt  true,  as  a  matter  of  fact  the  interpretation  of  the 
Massachusetts  law  was  unjust  because  incomes  derived  solely 

» Wilcox  vs.  Middlesex,  103  Mass.  544.  C/.  the  interesting  discussion  in 
J.  A.  Lane,  Address  on  Taxation  with  Special  Reference  to  Taxation  upon 
Income  derived  from  Property  subject  to  Taxation,  Boston  Executive  Busi- 
ness Association,  1891.  Cf.  also  Report  of  the  Special  Commission  on  Taxa- 
tion, Boston,  1891. 


102  ESSAYS  /A   TAXATION 

frnm  Hnd  or  from  other  investments  pay  only  once,  while 
bcles  derivedTom  business  enterprise  pay  tw.ce,  once  on 

■^,    "^^iCsvAs  emtoD.  .toilar  proviaon  l.nK«l.  by  I.. 

''^'^tlfiSonT  "-nof-cessarilyuni^^^^^^^ 
mdeedte  double  t^atum  that  to  tax  property  and  also 

r  •incrme'?^  pSerty  is  not  of  HseK  mec.u.aUe^^^^^^^^^^ 

taxed  higher  than  incomes  from  labor  connected 

The  second  important  case  of  double  taxation  >»  <=°  ^ 

ui,  +hp  miPstion  of  indebtedness.    Shall  debts  be  aeaucieu 

whole  property  including  the  debt 

Put  in  this  way  the  answer  is  plam     ^  "lanmus^^^  ^ 

upon  what  he  has  not  ^P^^^  J^^^o^^^^^^^  reason 

another  is  not  really  a  part  of  ^^^^  P^^J^^  aTe  changing  their 
why  the  countries  of  continental  Europe  are  cnang    & 

^  For  some  additional  eonsiderat-^^^^^^^^^^  "f^^ ^nZZ^'urui  die 
2  The  fullest  study  of  this  case  is  Meckel,  uie  xi-t 

Schtddzinsen,  1890. 


DOUBLE  TAXATION 


103 


system  from  taxation  of  product  to  taxation  of  income,  is  that 
under  the  former  method,  which  disregards  the  personal  posi- 
tion of  the  individual,  no  deduction  is  made  for  indebtedness; 
whereas  by  the  income  tax  such  deduction  is  made.  For  net 
income  can  mean  only  the  surplus  above  all  necessary  outlays — 
including  interest  on  debts — connected  with  the  acquisitioQ 
of  the  revenue.  Every  income  tax,  whether  in  Europe  or  in 
America,  therefore  permits  interest  on  indebtedness  to  be  de- 
ducted. 

What  is  true  of  the  income  tax  is  equally  true,  in  theory,  of 
the  property  tax.  But  the  practical  limitations  to  the  applica- 
tion of  the  theory  in  the  case  of  the  latter,  and  more  especially 
in  the  tax  on  personalty,  are  very  considerable.  The  unfor- 
tunate experience  of  the  United  States  has  already  been  dis- 
cussed. 

There  is,  however,  one  special  phase  of  the  question  which 
is  of  widespread  interest.  In  the  case  of  a  tax  on  land  or  on  real 
estate,  what  should  be  done  with  the  amount  of  the  mortgage? 
The  problem  of  double  taxation  arises,  as  in  several  of  the 
American  states,  when  the  borrower  or  mortgagor  is  assessed 
on  the  full  value  of  his  land,  and  the  lender  or  mortgagee  is  also 
taxed  on  the  amount  of  the  mortgage  debt.  If  A,  the  owner  of 
a  $100,000  farm,  borrows  $50,000  from  B,  the  state  thus  taxes 
$150,000,  when  there  is  really  only  $100,000  of  property;  and 
so  far  as  B  is  able  to  shift  his  tax  on  A,  the  latter  pays  the  taxes 
for  both.^  On  the  other  hand,  if  the  mortgagor  is  allowed  to 
deduct  the  value  of  the  mortgage,  and  if  the  mortgage  debt  is 
not  taxed  at  all  to  the  mortgagee,  the  state  loses  a  legitimate 
revenue.  It  now  taxes  A  on  $50,000  and  does  not  tax  B  at  all, 
thus  getting  a  revenue  from  $50,000,  when  there  is  really 
$100,000  of  property.  In  the  one  case  we  have  double;  in  the 
other,  we  have  inadequate  taxation. 

What  is  the  remedy?  Several  plans  have  been  tried.  Ac- 
cording to  the  first  the  mortgagor  is  taxed  on  the  full  amount 
of  the  property,  but  the  mortgagee  is  exempt.  This  method 
is  based  on  the  theory  that  the  tax  on  the  lender  will  be  shifted 
at  any  event  to  the  borrower,  that  as  a  result  of  the  exemption 
of  mortgages  capitalists  will  lend  more  readily  and  at  a  lower 
rate,  and  that  the  benefits  of  exemption  will  accordingly  be 

1  In  156  Pa.  488,  the  taxing  of  both  land  and  mortgage  was  held  not 
to  be  double  taxation. 


lii 


104 


ESSAYS  IN  TAXATION 


DOUBLE  TAXATION 


105 


'  i    I 


diffused  throughout  the  community.^  This  plan  is  obviously  the 
simplest  and  most  effective  method  of  avoiding  double  taxation. 
Several  American  states  have  now  adopted  this  plan,  with 
oreat  satisfaction  to  all  concerned.  For  under  this  scheme,  in 
the  case  mentioned  above,  the  state  will  still  get  the  revenue  on 
the  entire  $100,000  worth  of  property,  and  the  mortgagor  will 
not  have  to  pay  the  double  tax,  once  to  the  state  and  again  in 
the  shape  of  interest  to  the  lender. 

A  second  plan  consists  in  exempting  not  the  lender,  but  the 
borrower;  not  the  credit  of  the  mortgagee,  but  the  Uability  of 
the  mortgagor;  that  is,  to  tax  the  lender  on  the  amount  of  the 
mortgage  and  the  borrower  on  the  value  of  the  property  minus 
the  mortgage.     In  working  out  this  scheme,  however,  several 
commonwealths,  like  California  and  Massachusetts,  adopted 
a  slight  modification.    According  to  the  amended  plan,  th^ 
mortgagor  can  offset  the  amount  of  the  mortgage  debt.    The 
mortgage,  on  the  other  hand,  is  taxable  in  the  hands  of  the 
mortgagee,  but  it  is  treated  as  realty,  not  as  personalty— that 
is,  its  situs  does  not  follow  the  domicile  of  the  mortgagee,  but 
it'  is  taxed  in  the  locaUty  where  the  mortgaged  property  lies. 
If  the  tax  is  paid  by  the  mortgagor,  he  may  recoup  it  from  the 
mortgagee.    In  Massachusetts,  indeed,  this  provision  is  practi- 
cally void,  because  nearly  all  mortgages  contain  a  clause  requir- 
ing the  mortgagor  to  pay  taxes  upon  the  mortgaged  estate, 
and  a  further  agreement  to  pay  all  taxes  upon  the  debt  in  the 
event  of  the  repeal  of  the  law.    The  practical  result,  therefore, 
is  virtually  the  same  as  if  mortgages  were  exempt,  and  the  bor- 
rower taxed  on  the  total  value  of  his  land.^   In  California,  where 

1  See  Seligman,  The  Shifting  and  Incidence  of  Taxation,  3d  cd.  (1910), 

» sie  the  Report  of  the  Special  Committee  of  the  Boston  Executim  Business 
Associatim  on  Taxation,  1889,  p.  31.  For  an  investigation  of  thejiuestion 
as  to  how  far  the  rate  of  interest  has  been  affected,  see  Thomas  Hills,  Ad- 
ams on  Taxation,  delivered  before  the  Boston  Executive  Business  Association 
1H9(),  p.  20;  and  Nathan  Matthews,  Jr.,  "Double  Taxation  of  Mortgaged 
Real  Estate  "  in  Quarterly  Journal  of  Economics,  iv.  (1890),  p.  339.  Cf.  also 
R  H  Dana,  Double  Taxation  in  Massachusetts.  Published  under  the  auspwes 
of  the  Massachusetts  Anti-Double-Taxation  League,  1895,  pp.  72-86.  For 
earlier  discussions  of  the  subject  see  Benjamin  A.  Willis,  Remarks  on  the 
BUI  protriding  for  the  Exemption  of  Mortgages  on  Real  Estate  from  Taxatum, 
New  York,  1873;  John  C.  Ropes,  Taxation  of  Mortgaged  Real  Estate,  Boston, 
1881  •  A  W  Beard,  Taxation  of  Mortgaged  Property.  Remarks  before  the 
Legislative  Committee,  n.  p.  1881;  Henry  Winn,  The  Exemption  of  Monty 
Lenders  from  Taxation:  its  Effect  upon  the  Interest  Rate,  Turners  i^alls, 


the  plan  was  incorporated  into  the  constitution  of  1879,  all  such 
agreements  between  mortgagor  and  mortgagee  were  void.  This 
continued  until  1907  when,  after  an  amendment  to  the  constitu- 
tion in  1906,  a  law  was  passed  permitting  separate  contracts. 
Legal  enactments,  however,  cannot  prevent  the  operation  of 
economic  law.  As  a  matter  of  fact,  the  interest  rate  on  mort- 
gages rose  as  a  consequence  of  the  law,  and  it  has  even  been 
claimed  with  some  degree  of  truth  that  interest  rose  by  a  sUght 
amount  over  and  above  the  tax,  to  compensate  the  lender  for 
trouble  and  risk.^  By  the  end  of  the  nineties  this  was  beginning 
to  be  recognized,  and  during  the  next  decade  the  conviction 
of  the  futility  of  the  old  scheme  became  so  widespread  that  in 
1910  the  constitution  was  again  amended  so  as  to  provide  for 
the  complete  exemption  of  mortgages.  In  the  meantime,  how- 
ever, the  Massachusetts  or  California  system  had  been  intro- 
duced in  1903  in  Wisconsin,  leading  there  also  to  practical 
exemption.^ 

In  addition  to  these  methods  of  attempting  to  avoid  double 
taxation  we  find  some  alternative  and  halfway  schemes.  Sev- 
eral states  which  recognize  the  inevitable  shifting  of  a  tax  on 
mortgages  to  the  borrower  or,  on  the  other  hand,  the  practical 
impossibility  of  the  discovery  of  mortgages  by  the  assessors,  are 
nevertheless  not  ready  to  abandon  all  revenue  from  this  source. 
A  few  of  these  states  try  to  solve  the  problem  by  levying  a 
special  tax  on  mortgages,  but  at  such  a  low  rate  that  there  is 

1883;  and  the  same  author's  Mortgage  Exemption  and  Taxation  of  Real  Estate 
only,  Boston,  1889. 

1  See  C.  C.  Plehn,  "The  Taxation  of  Mortgages  in  California,"  in  Th£ 
Yale  Review,  viii.  (1899),  pp.  31-67.  For  later  studies  on  the  question  of 
the  incidence  of  the  tax  on  mortgages  see  Mortgage  Taxation  and  the  Bost- 
wick  Bills.  Prepared  by  the  New  York  Tax  Reform  Association,  New 
York,  1904;  Mortgage  Taxation  and  Interest  Rates,  New  York,  1906,  a  study 
made  by  the  New  York  Tax  Reform  Association;  T.  B.  Adams,  "Mortgage 
Taxation  in  Wisconsin,"  in  the  Quarterly  Journal  of  Economics,  xxii.  (1907), 
pp.  1-27;  and  II.  A.  Campbell,  Mortgage  Taxation,  Madison,  1908. 

2  The  same  system  at  one  time  existed  in  Michigan,  Missouri  and  Oregon. 
The  Missouri  constitutional  amendment  of  1900  was  declared  by  the  state 
court  to  be  opposed  to  the  federal  constitution  in  Russell  vs.  Croy,  164 
Mo.  69,  on  the  ground  that  corporate  mortgages  were  not  treated  in  the 
same  way  as  those  of  individuals.  In  Oregon  the  law  of  1882  was  declared 
unconstitutional  in  1884  for  much  the  same  reason,  but  the  defect  was 
removed  by  an  amendment  of  1885.  In  1893,  however,  the  law  was  re- 
pealed. The  Michigan  law  was  also  repealed  in  1893,  and  mortgages  were 
again  taxable  as  personal  property  until  1911  when  the  mortgage-recording 
law  was  enacted. 


il 


106 


ESSAYS  IN  TAXATION 


DOUBLE  TAXATION 


107 


'l'  I  I 


less  inducement  to  conceal  them.  A  few  others  attempt  to 
solve  the  problem  by  levying  a  small  tax  on  the  mortgage  when 
it  is  recorded,  and  thereafter  exempting  it.^  The  first  method 
involves  practical  exemption  from  the  beginning,  the  latter 
complete  exemption  after  the  first  year.  Thus  the  tendency 
may  be  said  to  be  everywhere  in  the  direction  of  exemption  as 
the  best  means  of  avoiding  double  taxation.^ 

In  the  above  discussion  we  have  treated  primarily  of  mdi- 
vidual  indebtedness.    The  same  question  often  arises  in  con- 
nection with  corporate  debts,  especially  in  the  shape  of  mortgage 
bonds.    It  has  usually  been  overlooked,  however,  that  there  is 
a  distinction  between  individual  and  corporate  property  or  in- 
come.   In  the  case  of  individuals,  to  tax  both  the  property  and 
the  amount  of  the  mortgage  debt  is  theoretically  unsound,  be- 
cause the  individual's  true  taxable  property  consists  in  his 
surplus  above  indebtedness.    The  capital  stock  of  a  corporation, 
however,  represents,  in  many  cases,  only  a  portion  of  the  prop- 
erty while  the  remainder  is  represented  by  the  bonded  indebted- 
ness!   In  the  United  States,  for  example,  it  is  well  known  that 
■  railroads  are  built  mainly  on  the  proceeds  of  mortgage  bonds. 
To  exempt  the  mortgage  debt  in  the  case  of  these  corporations 
would  thus  be  inequitable;  for  only  by  taxing  both  capital  stock 
and  mortgage  debt  can  the  state  reach  the  true  faculty  of  the 
corporation.    In  the  case  of  individuals,  indebtedness  diminishes 
the  capacity  to  pay  taxes;  in  the  case  of  corporations,  indebted- 
1  As  to  this  see  C.  F.  Robinson,  "The  Mortf^age  Recording  Tax"  in  the 
Political  Science  Qnarkrly,  vol.  xxv  (1910),  p.  600. 

«At  present  (1921)  only  eleven  of  the  American  states  still  tax  both 
mortgagor  and  mortgagee;  ten  (California,  Idalio,  Louisiana,  Maine, 
Maryland,  New  Jersey,  Oregon,  Utah,  Washington  and  Wyoming)  exempt 
mortgages  completely;  four  exempt  mortgages  not  exceedmg  a  certam  rate 
(New  Hampshire  and  Vennont,  5%;  Mississippi,  6%;  and  North  Carohna, 
5U%  if  not  over  $3,000)  within  the  state;  one  (Indiana)  exempts  mort- 
gaged'land  to  the  extent  of  $700,  provided  that  this  does  not  exceed  one- 
half  of  the  value  of  the  real  estate,  but  the  mortgage  credit  is  then  assessed 
to  the  mortgagee  at  his  residence;  seven  (C(3lorado,  Connecticut,  Ma^achu- 
setts,  Nebraska,  Nevada,  New  Jersey  and  New  Mexico)  deduct  the  mort- 
gage from  the  value  of  the  land,  but  permit  the  mortgagor  to  assume  the 
tax  the  mortgage  being  treated  as  an  interest  in  the  real  estate;  three 
(Iowa  Pennsylvania  and  Rhode  Island)  tax  mortgages  at  a  special  low 
rate-  'and  eleven  (Alabama,  Kentucky,  Michigan,  Minnesota,  Missouri, 
New  York,  North  Dakota,  Ohio,  Oklahoma,  South  Dakota,  Tennessee  and 
Virginia)  t'ax  mortgages  at  a  low  rate  when  they  are  recorded,  through  the 
mortgage-recording  tax.  Cf.  R.  A.  Campbell,  Mortgage  Taxation  Depart- 
ment, Madison,  1908;  and  E.  L.  McDonald,  Taxation  of  Mortgages  in 
Kentucky  (with  a  table),  Frankfort,  1916. 


ness  often  augments  that  capacity  because  the  so-called  debt  is 
in  reality  an  integral  and  constituent  part  of  the  capital. 

Strictly  speaking,  the  proper  distinction  is  not  between  cor- 
porate and  individual  credit,  but  between  production  and  con- 
sumption credit.  In  the  case  of  individuals,  money  borrowed 
for  purposes  of  consumption  or  to  meet  pressing  emergencies  cer- 
tainly comes  under  the  above  rule  that  indebtedness  is  to  be  re- 
garded as  a  burden.  When,  however,  money  is  borrowed  in 
order  to  enlarge  the  business,  the  credit  takes  the  place  of 
capital  and  may  enable  the  borrower  to  make  larger  profits. 
The  income  of  the  borrower  therefore  is  really  increased  by 
the  surplus. of  the  additional  net  profits,  due  to  the  loan,  over 
and  above  the  amount  of  the  interest  on  the  loan.  In  an  in- 
come tax  this  is  automatically  provided  for,  since  the  addi- 
tional profits  figure  on  the  one  side,  and  the  interest  charge 
on  the  other  side,  of  the  income  account.  Where  the  tax  is 
levied  on  property,  however,  no  allowance  is  made.  Strictly 
speaking,  only  so  much  of  the  borrowed  money  ought  to  be 
assessed  to  the  borrower  as  represents  the  capitalization  of 
the  surplus  profits.  Practically,  however,  this  is  impossible 
to  ascertain,  and  we  are  therefore  justified  in  demanding  an 
exemption  of  debts  from  the  property  tax. 

On  the  other  hand,  in  the  case  of  corporations,  while  debts 
are  sometimes  contracted  to  meet  pressing  exigencies,  and  may 
thus  in  a  way  be  considered  a  kind  of  consumption  credit,  mort- 
gage bonds  at  least  are  almost  exclusively  issued  in  order  to 
provide  capital.  Economically,  the  corporate  capital  consists 
of  the  bonds  and  the  stock.  In  England,  as  is  well  known,  there 
are  even  no  railroad  bonds  at  all,  but  simply  debenture  stock. 
It  is  therefore  quite  fitting  that  the  interest  on  corporate  bonds 
should  not  be  deductible  in  case  of  the  income  tax,  nor  the 
mortgage  bonds  themselves  in  case  of  the  property  tax.  It  is 
the  correct  recognition  of  this  fact  that  has  led  to  the  intro- 
duction of  the  tax  on  corporate  loans  in  many  states,  American 
and  foreign.^ 

We  come  now  to  the  third  case  of  double  taxation,  which 
in  th(j  modern  days  of  corporate  industry  has  assumed  much 

^  The  great  defect  in  the  otherwise  admirable  study  of  Heckel,  mentioned 
above,  is  the  failure  to  distinguish  between  corporations  and  natural  per- 
sons. He  is  indeed  forced  to  the  practical  conclusion  that  corporations  must 
be  liable  for  the  tax  on  mortgage  debts,  but  his  arguments  are  not  con- 
vincing; cf.  p.  182  of  his  work. 


m 


108  ESSAYS  IN  TAXATION 

importance -that  of  the  double  taxation  of  a  corporation  and 
of  the  investor  in  corporate  securities.    If  we  tax  the  corpora- 
tion, shall  we  also  tax  the  individual  stockholder  or  bondholder? 
The  great  divergence  of  practice  in  America,  as  well  as  abroad, 
will  be  discussed  in  another  chapter; '  but  the  economic  theory 
is  simple.    If  the  tax— whether  on  income  or  on  property—is 
general,  and  applies  to  all  classes  of  corporations  and  to  other 
non-corporate  investments  as  well,  it  is  mamfestly  double  taxa- 
tion to  assess  the  security  holder  as  well  a^  the  corporation. 
The  tax  on  the  corporation  diminishes  his  income  from  the 
corporate  security;  an  additional  tax  on  the  security  wodd  in- 
volve double  taxation  of  the  same  income  or  property,    but  i 
the  tax  is  a  special  or  exclusive  tax  instead  of  being  a  general 
tax,  the  matter  is  different.    In  that  case  the  general  doctrine 
of  capitaUzation  of  taxation  will  apply.^    If  only  one  class  of 
corporations  is  taxed,  the  purchaser  of  these  corporate  securities 
will  escape  taxation,  because  the  amount  of  the  tax  is  discounted 
in  the  depreciation  of  the  security.   For  example,  let  us  suppose 
that  a  corporation  previously  untaxed  has  been  paying  five  per 
cent  dividends  on  its  stock  quoted  at  par.    If  a  special  tax  of  ten 
per  cent  be  imposed  on  these  dividends,  the  stockholders  will 
get  only  four  and  a  half  per  cent.    But  since  by  the  supposition 
other  classes  of  corporations,  or  at  all  events  other  non-corporate 
investments,  are  not  taxed,  the  price  of  the  stock  will  fall  to 
ninety.    People  who  can  get  five  per  cent  on  their  capital  will 
not  ordinarily  consent  to  take  four  and  a  half  per  cent,     ihe 
original  holders  of  the  stock  will  indeed  lose,  but  the  new  pur- 
chasers will  not  be  affected,  because  the  tax  is  capitalized  and 
leads  to  a  depreciation  of  the  capital  value  of  the  stock     A 
dividend  of  four  and  a  half  dollars  on  stock  costing  ninety  is 
as  good  as  one  of  five  dollars  on  stock  costing  a  hundred.    A 
tax  levied  only  on  corporate  profits,  or  only  on  some  special 
classes  of  corporations,  does  not  affect  anyone  except  those  who 
become  stockholders  before  the  imposition  of  the  tax.     io  tax 
the  new  purchaser  on  his  security  would  not  in  such  a  case 
involve  unjust  double  taxation.^ 

*  Infra,  chap,  viii,  sec.  v.  .  ,  .  _<,- 

2  See  SeUgman,  The  Shifting  and  Incidence  of  Taxation  (3d  ed.),  pp.  2*21- 

^^^This  and  the  following  point  is  not  considered  at  all  either  by  Professor 
Wagner  who  is  opposed  to  such  double  taxation  pf  ^«''P«^^^'«"''^'  ^^i^^^,^ 
Steuern"  in  Schonbcrg's  Uandbuch  der  Pohlischcn  Oekonomie,  III.  1,  4th 


DOUBLE  TAXATION 


109 


There  is  one  other  condition  under  which  the  simultaneous 
taxation  of  the  corporation  and  the  security  holder  is  not  unjust. 
In  the  case  of  a  stockholder,  we  have  seen  that  if  the  tax  is  gen- 
eral it  is  unjust  to  tax  both  the  corporation  and  the  stock- 
holder. In  the  case  of  a  bondholder  this  would  also  ordinarily 
be  true  when  the  income  tax  on  the  corporation  is,  for  instance, 
deducted  from  the  interest  of  the  bondholder  as  well  as  from  the 
dividends  of  the  stockholder.  In  some  cases,  however,  it  hap- 
pens that  the  corporation  is  willing  to  assume  the  tax  as  a 
whole,  and  to  count  the  tax  among  its  fixed  charges,  declaring 
the  coupons  free  from  tax.  In  such  a  case  it  is  really  the  stock- 
holders who  pay;  for  the  interest  on  the  bonds  is  fixed,  and 
what  is  not  deducted  from  the  interest  must  be  paid  out  of  the 
surplus  earnings  which  would  otherwise  ultimately  go  to  the 
stockholders.  The  bondholders  are  not  reached  at  all  by  such 
a  tax,  except  in  the  very  indirect  way  that  they  may  be  exposed 
to  an  ultimate  diminution  in  the  security  of  their  lien.  But  the 
tax  as  such  does  not  strike  them  at  all;  their  property  or  income 
in  the  corporate  bonds  goes  scot-free.  An  additional  tax  upon 
the  bondholder  would  thus  really  not  involve  any  injustice  to 
them.  Here,  as  well  as  in  the  preceding  case,  a  study  of  the  real 
incidence  of  the  tax  becomes  important.  What  is  apparently 
double  taxation  may  turn  out  not  to  be  such. 

We  may,  therefore,  sum  up  by  saying  that  in  so  far  as  the 
tax  is  general,  it  is  manifestly  unjust  to  tax  both  corporation 
and  security  holder;  but  that  when  the  tax  is  partial  or  when  the 
corporation  assumes  the  tax  as  a  whole,  the  additional  taxation 
of  stockholder  or  of  bondholder  is  not  necessarily  either  double 
taxation  or  inequitable  taxation. 

There  remains  the  fourth  and  final  form  of  double  taxation 
by  the  same  jurisdiction,  which  has  given  rise  to  considerable 
difficulty.  This  appUes  especially  to  corporations.  The  ques- 
tion here  is:  Is  it  permissible  to  tax  the  corporation  on  its 
property  and  again  on  its  capital  stock? 

The  answer  from  the  economic  standpoint  is  simple.  While 
the  exact  relations  between  capital  stock  and  property  are  dis- 
cussed more  fully  below/  it  is  clear,  for  the  purposes  of  this 

ed.,  p.  428;  or  by  Professor  Schacffle,  who  is  in  favor  of  such  double  taxa- 
tion {Die  Steuern,  vol.  ii  (1895),  p.  24). 
*  Infra,  chap,  viii,  sec.  iii. 


I 


110 


ESSAYS  IN   TAXATION 


argument,  that  corporate  property  is  at  all  events  one  of 
the  elements  that  contribute  to  the  value  of  the  capital  stock. 
If  this  be  true,  to  tax  the  corporation  on  its  property  and  then 
to  levy  an  additional  tax  on  its  stock,  is  pro  tanto  duplicate  taxa- 
tion of  an  unjust  character.  If  other  persons  are  taxed  only 
once  on  property,  corporations  should  not  be  taxed  again  on 
what  is  at  all  events  a  part  of  their  property. 

This  concludes  the  discussion  of  the  important  cases  of  double 
taxation  arising  from  the  actions  of  the  same  tax  junsdiction. 
Equally  important  are  the  cases  due  to  the  conflicts  of  juns- 
diction between  independent  taxing  authorities.  These  we  now 
proceed  to  take  up. 

II.  Dmible  Taxation  by  Competing  Authorities 

The  problems  included  under  this  head  are  essentially  of 
modem  growth.    Until  very  recently  they  have  received  httle 
attention,  for  three  reasons.    In  the  first  place,  the  international 
relations  of  commerce  and  industry  were  comparatively  unim- 
portant; and  even  within  the  same  state  business  methods  and 
business  investments  were  far  more  localized  and  less  com- 
phcarted.     Secondly,   the  stranger  in  primitive   society  was 
originally  an  enemy.    The  survival  of  this  idea  in  the  concep- 
tion that  the  foreigner,  as  such,  is  an  especially  desirable  subject 
of  taxation  has  only  slowly  given  way  to  the  broader  conceptions 
of  the  modem  age.    Thirdly  and  chiefly,  in  former  times  but 
Httle  attention  was  given  to  the  question  of  justice  in  taxation. 
Even  when  the  general  problem  was  considered,  the  details  ot 
double  taxation  were  regarded  as  insignificant.    But  nowadays 
the  question  is  forging  to  the  front.  ,     -x-        « 

It  need  not  be  pointed  out  that  amid  the  complexities  of 
modern  industrial  life  equality  of  taxation  cannot  be  attained 
without  a  careful  consideration  of  these  problems,  ^o-day 
a  man  may  live  in  one  state,  may  own  property  m  a  second  and 
may  carry  on  business  in  a  third.  He  may  die  in  one  place  and 
leave  all  his  property  in  another.  He  may  spend  all  his  income 
in  one  to\vn  and  may  derive  that  income  from  property  or 
business  in  another  town.  He  may  carry  on  business  m  several 
states,  or  if  he  has  invested  in  corporate  securities,  the  corpora- 
tion may  be  the  creature  of  another  state  and  may  be  situated 
or  do  business  in  a  third.  All  these  cases  may  affect  foreign 
states  or  separate  commonwealths  of  the  same  federal  state,  or 


DOUBLE  TAXATION 


111 


separate  cities  or  counties  of  the  same  commonwealth.     The 
possible  entanglements  are  well-nigh  innumerable.^ 

The  question  thus  arises:  Where  shall  a  man  be  taxed? 
Whatever  principle  we  lay  down,  it  is  plain  that,  if  every  state 
or  every  tax  authority  followed  the  same  principle,  it  would  be 
easy  to  avoid  double  taxation.  The  complications  arise  from 
the  fact  that  one  state  follows  one  principle,  and  that  another 
state  follows  an  opposite  or  conflicting  principle.  Let  us  discuss 
the  different  principles  that  have  actually  been  employed. 

The  oldest  principle  is  that  of  citizenship  or  political  alle- 
giance. Originally  only  the  citizen  of  the  state  or  the  burgess 
of  the  town  had  any  obligation  to  the  government  under  which 
he  lived.  But  it  soon  happened  that  commercial  relations  de- 
veloped, until  in  modern  times  the  actual  population  of  any 
state  or  community  is  by  no  means  limited  to  citizens.  To  tax 
only  the  citizen  and  to  exempt  the  stranger,  whether  the  stranger 
be  from  another  state  or  only  from  another  city,  would  plainly 
be  inadmissible.  Political  allegiance  in  this  sense  is  nowhere 
to-day  made  the  basis  of  taxation.  Yet  when  political  allegiance 
involves  a  positive  rather  than  a  negative  attitude,  it  is  still 
followed,  at  all  events  in  international  relations.  While  the 
stranger  is  not  exempted,  the  citizen  living  abroad  is  fre- 
quently held  responsible  to  his  country.  PoUtical  fealty  cannot 
be  so  easily  abandoned;  political  rights  involve  political  duties. 
Among  them  is  certainly  the  duty  to  pay  taxes. 

In  modern  times,  however,  the  force  of  political  allegiance 
has  been  considerably  weakened.  The  political  ties  of  a  non- 
resident to  the  mother  country  may  often  be  merely  nominal. 
His  life  may  be  spent  abroad  and  his  real  interests  may  be 
indissolubly  bound  up  with  his  new  home,  while  his  loyalty 
to  the  old  country  may  have  almost  completely  disappeared. 

^  The  question  has  naturally  attracted  some  attention  in  federal  states. 

We  find  little  discussion  of  the  problems  in  French  or  English  books  on 

finance.    It  is  only  lately  that  the  matter  has  been  seriously  discussed  in 

Germany  and  Switzerland.    See  especially  Schanz,  "Die  Ort  der  Bes- 

teuerung,"  in  Finanz  Archiv,  vol.  ix  (1892);  and  G.  Antoni,  "Die  Steuer- 

subjekte  im  Zusammenhalte  mit  der  Durchfuhrung  der  Allgemeinheit  der 

Besteuerung,"  in  Finanz  Archiv,  vol.  v  (1888),  p.  916.     A  more  recent 

work  is  J.  Fischer,  Die  Doppelbesteuermig  in  Staat  und  Gemeinde.   Eine 

Untersuchung  uber  die  Besteuerung  der  Bundesverwandten  und  Ausldnder, 

sowie  der  Forensen,  nach  den  direkten  Staats-  und  Gemeindesteuergesetzen 

Deutschlands  und  der  Schweiz,  Berlin,   1909.    Of.  also  H.  Kramer,  Die 

Emkommen'  und  Vermogenbesteuerung  der  Ausldnder  und  Forensen,  Berlin, 
Ayuy. 


• 


112  ESSAYS  IN  TAXATION 

In  many  cases,  indeed,  the  new  home  will  also  become  the  place 
of  fnew  political  allegiance.  But  it  is  well  known  that  in  some 
countries  the  political  bond  cannot  be  dissolved  even  by  per- 
manent emigration;  while  it  frequently  happens  that  the 
rSrant  has  no  dkre  to  ally  himself  politically  w.th  what  is 
socially  and  commercially  his  real  home.  In  the  modern  age  of 
the  international  migration  of  persons  as  well  a«  f  ^^^^^^^^^ 
political  allegiance  no  longer  forms  an  adequate  test  of  ^dividual 
fiscal  obUgation.    It  is  fast  breaking  down  m  practice,  and  it  is 

clearly  insufficient  in  theory.  i  .    ^u  4.    <•  ^^^^ 

The  second  principle  that  may  be  followed  is  that  of  mere 
temporary  residence;  every  one  who  happens  to  be  m  the  town 
or  s?ate  may  be  taxable  there.  This,  however,  is  a  so  inade^ 
nuate  If  a  traveller  chances  to  spend  a  week  in  a  town  just 
when 'the  tax  collector  comes  around,  there  is  no  f^f J^^^^J^ 
why  he  should  be  assessed  on  his  whole  property  by  this  par- 
ticular town:  the  relations  between  him  and  the  government 
are  too  slight.  Moreover,  as  he  goes  from  place  to  place,  he 
may  be  taxable  in  each  place  or  in  none.  Temporary  residence 
is  plainly  inadmissible  as  a  test. 

The  third  principle  is  that  of  domicile  or  permanent  resi- 
dence     This  is  a  far  more  defensible  basis,  and  it  has  many 
arguments  in  its  favor.    Those  who  are  permanently  resident 
LTplace  ought  undoubtedly  to  contribute  to  ^ts  exp-^^^^^^ 
But  the  prmciple  is  not  perfectly  satisfactory.     For,  m  the 
firTt  place,  a  large  part  of  the  property  m  the  town  may  be 
owLd  by  outsiders:  if  the  government  were  to  depend  only  on 
the  permanent  residents,  it  would  lose  a  portion  f  f  rightfu^ 
dues^   In  the  second  place,  most  of  the  revenues  of  fe  res^^^^^^^^ 
population  may  be  derived  from  outside  sources,  as  from  busi- 
^rconducted^in  other  states.    In  this  case,  the  fo-e  govern- 
ment would  be  gaining  at  the  expense  o]  its^^if^^^^'   J™; 
property  owners  like  the  absentee  landlords  of  Ireland  or  the 
absentee  stockholders  of  the  railways  in  the  western  ^^^^^^^ 
America  cannot  be  declared  devoid  of  all  obhgation  to  the 
place  whence  their  profits  are  derived.     Domicile,  therefore, 
cannot  be  the  exclusive  consideration. 

The  fourth  principle  is  that  of  the  location  of  tbe  property. 
This  again  is  undoubtedly  legitimate  to  a  certain  extent,  tor 
a  man  who  owns  property  has  always  been  considered  to  have 
such  close  relations  with  the  government  of  the  town  or  county 
where  his  property  is  situated,  ixs  to  be  under  a  very  decided 


DOUBLE  TAXATION 


113 


obligation  to  support  it.  But  for  reasons  just  the  reverse  of  those 
mentioned  in  the  preceding  case,  the  location  of  the  property 
clearly  cannot  be  the  only  test.  Permanent  residents  of  means 
owe  some  duty  to  the  place  where  they  live,  even  if  their  prop- 
erty is  situated  elsewhere.  A  New  Yorker  who  has  invested 
even  his  whole  property  abroad  cannot  be  said  to  be  entirely 
without  any  duty  to  support  the  New  York  or  American  govern- 
ment. 

We  see  then  that  each  of  the  last  three  principles — tem- 
porary residence,  domicile  and  location  of  property — has  a 
certain,  but  none  a  complete  justification.  There  is,  however, 
one  final  principle,  toward  which  all  modern  governments  are 
tending,  which  reconciles  the  three  preceding  tests.  This  is 
the  principle  of  economic  interest  or  economic  allegiance,  as 
against  the  antiquated  doctrine  of  political  allegiance.  Every 
man  may  be  taxed  by  competing  authorities  according  to  his 
economic  interests  under  each  authority.  The  ideal  solution 
is  that  the  individual's  whole  faculty  should  be  taxed;  but  that 
it  should  be  taxed  only  once,  and  that  it  should  be  divided 
among  the  tax  districts  according  to  his  relative  interests  in 
each.  The  individual  has  certain  economic  interests  in  the 
place  in  which  he  happens  to  live,  in  the  place  of  his  domicile, 
and  in  the  place  or  places  where  his  property  is  situated  or  from 
which  his  income  is  derived.  If  he  makes  money  in  one  place,  he 
often  spends  it  in  another. 

It  has  been  pointed  out  elsewhere  that  the  conception  of 
faculty  in  taxation  involves  two  considerations, — those  con- 
nected with  acquisition  or  production,  and  those  connected 
with  outlay  or  consumption.^  In  apportioning  the  total  fiscal 
obhgation  of  the  individual  it  is  therefore  necessary  to  ascer- 
tain from  what  place  or  places  his  earnings  are  derived,  and 
then  to  observe  in  what  place  or  places  they  are  expended. 
Only  in  this  way  can  his  real  economic  interests  be  located. 

From  this  point  of  view  the  solution  of  the  problem  would  be 
easy.  Let  the  state  or  states  from  which  the  earnings  are  received 
divide  among  themselves  the  taxes  on  production,  that  is,  the 
taxes  levied  according  to  property  or  income  or  business  or 
any  other  measure  of  productive  capacity:  let  the  state  where 
the  individual  lives  and  where  the  earnings  are  spent  levy 
taxes  on  consumption,  whether  direct  or  indirect. 

*  See  Seligman,  Progressive  Taxation  in  Theory  and  Practice,  2d  ed.  (1908), 
pp.  290-294. 


f 


t/ 


114  ESSAYS  IN  TAXATION 

This  plan,  however,  involves  one  serious  difficulty.     Bc- 
Denditure,  for  obvious  reasons,  is  no  longer  considered  so  satis- 
Lctra  basis  of  taxation  as  revenue    And  although  ta^es  on 
cons,S.ption  are  still  largely  employed  aad  are  defensible   or 
the  central  authorities,  their  use  for  local  or  commonwealth 
purposes  tends  everywhere  to  be  restricted  to  narrow  himts. 
Where  taxes  on  consmnption  are  abandoned   it  .becomes  nec- 
essarv  to  devise  some  compromise  in  apportioning  the  taxes 
on  production.   Some  .vriters  have  suggested  that  three-quarters 
of  the  tax  on  property  or  business  or  earmngs  shoidd  go  to 
the  state  of  domicile,  while  others  have  proposed  an  equal 
division.    It  may  be  conceded  that  the  exact  d>vis>on  is  nec- 
essarily arbitrary;  but  even  an  arbitrary  division  is  ^tter  tha^ 
no  division  at  all.    Whatever  figures  we  adopt,  it  is  none  the 
less  clear  that  the  principle  of  ecmomic  irUerest  will  help  us  out 

of  many  a  difficulty.  , 

In  international  relations  we  have  scarcely  begun  to  apply 
the  doctrine;  in  fact,  we  still  cling  in  part  to  the  principle  of 
political  allegiance.    The  result  is  much  unjust  double  taxation 
In  internal  relations,  as  in  the  federal  stat^  of  America  Ger- 
many and  Switzeriand,  more  progress  has  been  made,    in  the 
United  States,  as  to  a  large  extent  everywhere  else,  the  rule 
of  Mm  has  been  applied  to  real  estate.    This  is  taxed  w^ere 
it  is  situated.    But  in  the  case  of  personalty  or  busies  mc.st 
countries  waver  between  the  doctrines  oi  ntus  and  of  domiale. 
In  America,  for  example,  while  most  of  the  stat^  tax  per- 
sonal property  actually  located  within  their  bounds,^  we  find  in 
r^any  places  Ihe  legal  principle,  which  had  it«  ongm  in  entireb^ 
different  reasons,  that  personalty  follows  the  owner-r«ob,ha 
personam  sequurUur.'     Accordingly   if  the   owner   is   a  non- 
resident, his  personal  property  may  be  taxed  twice^nce  by  the 
stete  where  iVis  located,  and  again  by  the  state  of  his  domicile. 

1  Cf  from  the  point  of  view  of  international  law  various  essays  by  E. 
Lchr^LTdoubC  impositions  en  droit  international,"  m  Journal  CUmel, 
wm  n  7^  "l2  baL  de  l'imp6t  en  droit  international,"  in  Revue  de 
laoi,  p.  *.-:,     Lxsu^  i~  uptimes  des  mndts  en  droit 

droit  international,  189/,  p.  428,     L<>s  Bases  legiiimra  "„„,',•  - 

doubles  impositions,"  ibid.,  1900,  p.  435.  hr  tt  S   «il7 

a  That  tWs  is  permissible  is  recognized  in  Coe  vs.  Errol   116  U.  S  517. 
»Or    as  it  is  sometimes  put,  mobilia  inhaerent  Qssihm  domim.     LJ-  in 
ur,  as  II  1^  '*""j':''"7°  *     '  „  .-.^^  «o^  c^o    The  oricinal  use  made  of 
general,  Story,  Conflict  of  Laws  §§  362  383,  55U.    ^^^  ^"^^"^        „ 
this  principle  in  America  may  be  seen  m  Cathn  vs.  Hall,  21  Vt.  152. 


DOUBLE  TAXATION 


115 


In  the  United  States  several  commonwealths  have  indeed 
provided  by  statute  for  the  exemption  of  a  resident's  person- 
alty, if  located  and  taxed  in  another  state.    Such  is  now  the 
law  in  Alabama,  California,  Connecticut,  Indiana,  Louisiana, 
Maine,   Massachusetts,   Missouri,   New  Jersey,   Ohio,   Rhode 
Island,  South  Carolina,  Vermont  and  West  Virginia.^    The  same 
rule  has  been  extended  by  judicial  interpretation  to  Illinois, 
Kansas,  Missouri,  New  York,  North  Carolina  and  Ohio.^    In 
other  commonwealths  the  rule  is  applied  only  in  part.    Thus  in 
Arkansas,  South  Carolina  and  Virginia  a  similar  exemption  is 
made  for  all  personalty  except  in  so  far  as  money,  credits  or 
investments  in  business  are  concerned.^    In  Delaware  only  so 
much  of  the  personalty  is  exempt  as  consists  of  non-productive 
securities  of  other  commonwealths.^   Finally,  in  Michigan  all  the 
personalty  of  a  resident  is  taxable  except  that  which  is  invested 
in  another  commonwealth.  ^    But  in  most  of  the  commonwealths 
the  legal  fiction  still  prevails,  and  the  individual  is  taxed  on  all 
his  personalty  irrespective  of  its  location.    The  obvious  result  is 
double  taxation  of  a  nature  v/hich  cannot  possibly  be  justified. 

» Ala.  Code  (1896),  §  3911;  Cal.  Polit.  Code  (1903),  §  3607;  Conn.  Gen. 
Stat.  (1902),  §  2321  et  seq.  (applies  to  property  actually  invested  in  mer- 
chandising or  manufacturing);  Ind.  Annot.  Stat.  (1894),  §8410;  La  Act 
July  9,  1890,  no.  106,  §  1;  Mass.  Laws,  1918,  c.  129;  Me.  Rev.  Stat.  (1904) 

"^^JJ  ^^""=  ^'''  ^^'''  ^^^*-  (^^^^)'  §§  7^3'  7508,  7531;  N.  J.  Rev.  Stat! 
(1877),  p.  1151;  O.  Rev.  Stat.  (1892),  §2735;  R.  I.  Pub.  Stat.,  chap.  42, 
§  9  (applies  only  to  machinery,  machine  tools,  stock  in  trade,  merchandise 
lumber,  coal  and  stock  in  livery  stables);  S.  C.  Code  (1902).  §268-  Vt' 
Stat.  (1894),  §  362-lV;  W.  Va.  Code,  chap.  29,  §  48.  ^'  »        '       • 

2  Mills  vs.  Thornton,  26  III.  300  (1861);  Fisher  vs.  Commissioners  of 
Rush  County,  19  Kan.  414;  State  vs.  St.  Louis  County,  47  Mo.  594  (1871)- 
State  ex  rel.  Dunnica  vs.  County  Court,  69  Mo.  454  (1879) ;  Valle  vs.  Ziegler,' 
84  Mo.  214  (1882);  People  ex  rel.  Hoyt  vs.  Commissioners,  23  N.  Y.  224 
(1861),  which  decided  that  shares  of  foreign  corporations  are  exempt  from 
local  taxation  in  New  York  because  they  have  no  situs  in  the  state;  People 
ex  rel.  Trowbridge  vs.  Commissioners,  4  Hun,  595  (1875);  2  Jones  Eq. 
Rep.  53,  where  the  principle  mobilia  -personam  sequuntur  is  declared  to 
be  'a  fiction  which  has  no  application  to  questions  of  revenue";  Carrier  vs 
Gordon,  21  Ohio,  605  (1853).     The  Supreme  Court  has  now  recognized 
the  pnnciple  that  tangible  personality  if  permanently  located  is  taxable 
where  located,  and  not  elsewhere.     Union  Transit  Co,  vs.  Ky.,  199  US  194  • 
Southern  Pacific  Co.  vs.  Ky.,  222  U.  S.  63.     For  a  comprehensive  survey 
of  the  law  see  "Analysis  of  Cases  relating  to  Situs"  by  E.  F.  Trabue  in  Pro- 
ceedings of  the  National  Tax  Association,  Eighth  Conference,  1915   p   242 
'  Ark    Mansfield's  Digest,  sec.  5048;  S.  C.  Gen.  Stat.,  chap.  11,  sec.  149; 
Va.  Code,  sec.  492.  ,        i        ,     u  x^», 

*  Del.  Laws  1879,  chap.  2.  ^  Mich.  Laws  1885,  no.  153,  sec.  2. 


n 


Ill 


! 


116 


ESSAYS  IN   TAXATION 


According  to  the  doctrine  of  economic  interest,  the  solution 
is  plain.  A  large  part  of  the  tax  should  go  to  the  place  where 
the  property  lies  or  whence  the  earnings  are  derived;  a  smaller 
share  to  the  domicile  of  the  owner.  But  this  presupposes  uni- 
form action  on  the  part  of  the  conflicting  authorities.  As  long 
as  no  interstate  or  intercommunal  agreements  are  made,  the 
simplest  plan  would  be  for  the  state  of  location  to  tax  the  tan- 
gible property,  and  the  state  of  residence  to  tax  the  intangible 
property  or  income  therefrom. 

This  conclusion,  however,  is  complicated  by  several  con- 
siderations. In  the  first  place,  the  intangible  property  may 
consist  of  corporate  securities,  while  the  corporation  may  al- 
ready be  taxed  in  the  state  where  it  is  situated;  secondly,  the 
intangible  property  may  consist  of  a  mortgage  on  real  estate 
abroad,  which  in  that  state  is  treated  as  realty  and  already 
taxed;  and  finally,  the  American  experience  with  the  taxation 
of  intangible  personalty  in  general  is  very  sad.  For  practical, 
purposes,  therefore,  the  conclusion  would  be:  Tax  only  realty! 
and  tangible  personalty,  and  tax  this  in  the  state  of  location. 
When  the  era  of  interstate  agreements  is  finally  reached,  it 
will  be  feasible  to  attempt  the  more  ideal  plan  of  taxing  the  en- 
tire property  or  income,  dividing  the  proceeds  among  the 
states  of  location  and  domicile  according  to  a  pre-estabUshed 
proportion,  and  in  harmony  with  the  doctrine  of  economic 
interest.  In  the  interval  it  may  be  possible  to  reach  intangible 
personalty  through  some  form  of  national  taxation,  the  general 
government  then  to  apportion  the  proceeds  to  the  states. 

In  Germany  and  Switzerland  the  situation  is  much  simpler 
than  in  the  United  States  because  of  the  existence  of  federal 
laws  regulating  the  entire  subject.  In  Germany  the  federal 
regulation  dates  from  1870,  and  was  further  developed  by  a 
law  of  1909.1  A  German  citizen  is  now  subject  to  direct  taxes 
only  in  the  state  of  his  domicile  or,  where  he  has  no  domicile, 
in  the  state  of  his  residence.  Real  estate  and  so-called  fixed 
industry  {stehende  Gewerhe)  can  be  taxed  only  in  the  state 
where  the  real  estate  or  place  of  business  is  situated.  If  there 
»  Cf.  Th.  Clauss,  "Das  Reichsgesetz  vom  13  Mai,  1870  wegen  Beseiti- 
gung  der  Doppelbesteuerung  unter  vergleichender  Berucksichtigung  d^ 
Schweizer  Bimdesrechts  erlUutert,"  in  Finanz  Archiv,  vol.  v.  (1888),  p.  138 
et  seq.;  "Deutsches  Doppelsteuergesetz  vom  22  Marz,  1909,"  ibidem,  vol. 
xxvi.  (1909),  p.  809  et  seq.;  R.  Blochmann,  "Das  Reichsgesetz  wegen 
Beseitigung  der  Doppelbesteuerung  vom  13  Mai,  1870  erlautert,  in 
Annalen  des  Deutschen  Reichs,  1887,  nos.  7-10. 


DOUBLE  TAXATION 


117 


are  several  such  places  of  business,  the  tax  is  divided  among 
the  various  states  according  to  a  fixed  proportion.  If  anyone 
is  assessed  in  one  state  for  a  direct  tax  when  he  has  paid  a 
similar  tax  in  another  state  for  the  same  period,  he  has  a  right 
to  reimbursement.  The  German  law,  however,  is  not  complete 
in  that  it  does  not  regulate  the  interlocal  taxation.  In  the 
matter  of  local  taxation  it  was  thought  best  to  leave  the  adjust- 
ment of  conflicts  to  inter-state  agreements,  and  of  these  not  a 
few  have  been  consummated. ^ 

In  Switzerland,  on  the  other  hand,  the  federal  law  applies 
to  local  as  well  as  to  state  taxation.  It  was  not  until  1874  that 
the  constitution  empowered  the  federal  government  to  prevent 
double  taxation.  After  that  time  the  federal  council  rendered 
a  number  of  decisions  most  of  which  were  summed  up  in  the  law 
of  1885.2  The  principles  enforced  are  the  same  as  in  Germany, 
but  are  carried  out  in  further  detail  and  with  greater  effective- 
ness. The  law  apphes  also  to  inheritance  taxes,  which  accrue 
in  the  case  of  real  estate  to  the  canton  where  it  is  situated, 
and  in  the  case  of  personalty  to  the  canton  where  the  de- 
ceased was  domiciled. 

It  will  be  well  now  to  take  up  in  turn  the  most  important 
cases  of  double  taxation  by  different  jurisdictions.  As  the 
problems  apply  to  interstate  or  inter-municipal  complications 
as  well  as  to  difficulties  between  foreign  countries,  the  word 
alien  must  be  understood  to  include  persons  from  another 
town  or  commonwealth  as  well  as  from  a  foreign  country. 
And  since  the  questions  are  precisely  the  same  when  applied 
to  corporate  business  as  when  applied  to  individuals  or  indi- 
vidual business,  the  term  citizen  must  be  understood  to  mean 
legal  as  well  as  natural  persons.  Let  us  proceed  to  discuss 
the  cases  in  order. 

^Cf.  Dr.  Strutz,  "Die  Gemeindebesteuerung  des  Einkommens  aus 
auslandischem  Grundbesitz  und  Gewerbebetrieb  in  Deutschland,"  in 
Verwaltungsarchiv,  vol.  iv.  (1896),  p.  209;  and  Brincour,  op.  ciL,  p.  10. 

*  C/.  the  two  works  by  E.  Ziircher  and  F.  Schreiber,  each  entitled, 
Kritische  Darstellung  der  hundesrechtlichen  Praxis  betreffend  das  Verbot  der 
Doppelbesteuerung  und  Vorschldge  zur  Regelung  dieser  Frage,  and  each  pub- 
lished in  1882;  B.  Van  Muyden,  Expose  critique  de  la  jurisprudence  federale 
en  matiere  de  double  imposition  suivi  des  proportions  en  vue  de  reglement  de 
eette  question  par  une  loi  federate,  1882;  P.  Speiser,  Das  Verbot  der  Doppel- 
besteuerung (1887);  C.  A.  Brodtbeck,  Unser  Bundesrecht  in  Doppelbe- 
steuerungssachen  (1898);  P.  Steiger,  "Ueber  die  Grundzuge  eines  Bundes- 
gesetzes  betreffend  das  Verbot  der  Doppelbesteuerung,"  in  Zeitschrift  fUr 
Bchweizerisches  Recht,  vol.  43  (1902). 


118  ESSAYS  IN  TAXATION 

1  SMI  a  reddenl  dlizen  he  taxed  on  his  vroperty  abroad  or 
^n^nt:m:t{rl"Sons  the  principle  of  political  alle- 
At  rSely  followed.  ^^^^^^tZtX'^"^^ 

^"h^eSlkcome,  whether  recced  abroad  ^^^^^^^^^^^    H ,  -J 
usually  the  case,  the  '"^-^o-e  :s  agam  tax^^^^  ''uVoZ  in  the 

we  have  a  f  ^^^f^J^Se  o'  S^^       ^^  ^^^  ^° 
ferarnXnXt'thrSir.e  of  location  is  applied  to  a 

Tn  Sfand  local  taxation  the  Pn-iple  of  economic  int^^^^ 
est  .has  made  -re^-^^^^-  J^^l^^^^S  atdt^iS  c^n- 
Z::  theTl :  SLt'^nLraPPUed  to  real  estate  and^^ 
rgible  personalty  and  business;  the  rule  of  do-«  e  to  other 
forL  of  property  or  revenue  In  J^-^^^^^^^be  assessed 
•  =£t  ita^n-TraluiL:^  r^S  ar'e  only  a.  approx- 

t^;Lrairaiati:  :^^ 

^^TaT^w 'stat:  :lw  puiue  tL  mU  senTible  policy  of  taxing 
ever,  a  tew  States  now  pui  .      ^QrnisiX  or 

the  domestic  corporation  only  -^^^^^^  This 

earnings  which  is  employed  or  ^eceivea  wi 

is  perhaps  as  near  as  we  can  get  at  the  present 

practicable  solution.  u.  ,n^pA  nn  Us  vroverty  abroad 

2   Shall  a  non-resident  cituen  he  taxed  on  nis  prope^r  y 

or  on  his  irwor,,^  from  abroad?  j^;      „{  the  principle  of 

This  seems  to  involve  a  great  sj'et^'^^^g  ^        J^.^^  ^^  the 

political  allegiance;  yet  we  find  it  to  "y °^  P  -^  the 

present  day  in  internat.ona^  [^^frUnitlrStat?  an  Amer- 

irr  w.y "r;  IT^I  IhoVintome"!  whether  he  resided  in 
lean  wa^  taxea  on  nib  however,  like  England  and 


DOUBLE   TAXATION 


119 


foreign  income.  Other  countries  cling  only  nominally  to  the 
principle,  by  providing  for  a  remission  of  taxes  in  case  the 
citizen  is  actually  taxed  abroad.  And  still  others,  like  Russia, 
compromise  the  matter  by  exempting  the  citizen  after  he  has 
lived  abroad  two  years. 

In  state  and  local  taxation,  the  tendency  is  far  more  evi- 
dent to  settle  the  matter  according  to  the  doctrine  of  economic 
interests.  According  to  this  principle,  there  is  no  imagina- 
ble reason  why  a  non-resident  citizen  should  be  taxed  for  his 
property  abroad.  Moreover,  neither  the  principle  of  location 
nor  that  of  domicile  has  any  application.  Even  if  it  were  desira- 
ble to  levy  such  a  tax,  it  is  difficult  to  see  how  the  obligation 
could  be  enforced,  unless  the  non-resident  happened  also  to 
own  some  real  estate  at  home.  And  even  then,  the  home  prop- 
erty would  scarcely  be  liable  for  the  taxes  of  the  non-resident 
on  his  foreign  income. 

3.  Shall  a  non-resident  citizen  be  taxed  on  his  property  at 
home  or  on  his  income  earned  at  home? 

Here,  again,  the  ideal  solution  would  be,  as  in  the  j&rst  case, 
that  the  home  government  should  levy  not  the  entire  tax,  but 
only  the  greater  part,  leaving  a  small  share  to  the  foreign  govern- 
ment. But  in  default  of  such  an  arrangement,  the  most  prac- 
ticable method  is  for  the  home  government  to  levy  the  whole 
tax,  and  to  trust  to  the  foreign  government  to  avoid  double 
taxation. 

As  a  matter  of  fact,  this  is  the  practice  in  international 
relations.  Almost  everywhere  the  income  earned  at  home  is 
taxable  even  though  the  citizen  lives  abroad;  for  in  this  case 
the  principles  of  citizenship  (or  political  allegiance)  and  of 
location  come  together.  In  state  and  local  taxation,  however, 
the  practice  is  considerably  modified  by  the  principle  of  dom- 
icile, as  appUed  to  certain  forms  of  personalty  or  income.  We 
have  seen  the  practice  in  America  in  regard  to  property;  and 
in  the  few  cases  of  income  taxation,  the  custom  is  still  further 
restricted.  In  Massachusetts  and  Virginia,  for  instance,  the 
income  tax  applies  only  to  residents. 

4.  Shall  a  resident  alien  he  taxed  on  his  property  or  income 
in  the  state  of  residence? 

This,  together  with  the  two  following  cases,  is  the  reverse 
of  the  preceding  cases.  It  is  indeed  evident  that  the  alien  should 
not  be  treated  with  greater  favor  than  the  citizen.  Accordingly, 
if  the  non-resident  citizen  be  taxed,  the  resident  alien  should 


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•  I 


certainly  not  be  exempt  in  so  far  as  the  same  property  is  con- 
cerned    In  international  relations  most  states  have  here  aban- 
doned the  doctrine  of  political  allegiance.    There  is  no  reason 
why  it  should  not  be  abandoned;  for  the  principles  of  domicile 
and  of  location  here  converge  and,  combined,  far  outweigh 
that  of  citizenship.    In  state  and  local  taxation  the  matter 
is  somewhat  compUcated  by  a  survival  of  the  old  jealousy  of 
strangers.    Not  only  is  the  resident  aUen  taxed,  but  he  is  some- 
times taxed  at  a  higher  rate  than  the  citizen,  or  is  taxed  when  the 
citizen  is  exempt.    We  find  this,  for  instance,  in  the  Umted 
States  where  a  higher  rate  is  imposed  on  certain  foreign  com- 
panies {i.e.  resident  aliens).    A  way  out  of  the  difficulty  has  been 
outUned  in  the  so-called  reciprocal  laws,  according  to  which 
a  state  taxes  resident  aliens  in  the  same  way  that  its  citizens 
resident  in  the  foreign  state  are  there  taxed.^     The  wholesome 
dread  of  reprisals  is  often  sufficient  to  prevent  unjust  double 

taxation.  ^      i      j 

5.  Shall  a  resident  alien  he  taxed  on  his  property  abroad  or 

on  his  income  earned  abroad? 

This  case  is  not  quite  so  simple.  We  have  seen  that  if  we 
abandon  the  principle  of  political  allegiance  and  substitute 
that  of  economic  interest,  a  large  part  of  the  tax  should  be  paid 
to  the  country  where  the  property  is  situated,  and  only  a  small 
part  to  the  country  of  domicile.  But  where  this  ideal  cannot 
be  attained,  we  found  it  simpler  to  apply,  as  far  as  possible, 
the  doctrine  of  location. 

In  international  relations  it  is  to  be  noticed  that  almost  all 
states   have   abandoned   the   doctrine   of   political   allegiance 
and  have  substituted  that  of  domicile.     That  is,  in  England 
and  in  most  of  the  German  states  residents  are  liable  to  the 
income  tax  on  their  whole  income,  whether  they  are  aliens  or 
citizens,  and  whether  the  income  is  derived  from  the  home 
country  or  from  abroad.    This  was  also  the  case  in  the  1894 
income  tax  in  the  United  States.    To  put  it  in  another  way: 
when  the  principle  of  citizenship  is  advantageous  to  a  state, 
it  is  applied;  when  it  is  disadvantageous,  it  is  not  applied.    Only 
a  few  countries  exempt  the  foreign  property  or  income  of  a 
resident  alien.     If  the  foreign  state  appHes  the  principle  of 
citizenship  and  the  home  state  the  principle  of  domicile,  as  is 
frequently  the  case,  it  is  not  to  be  wondered  at  that  there  should 
be  so  much  double  taxation. 

*  See  infra,  chap,  vi,  sec.  ii,  §  2. 


In  state  and  local  relations  the  doctrine  of  economic  inter- 
ests has  made  considerably  more  headway.  Little  attention 
is  paid  to  the  question  whether  the  resident  is  a  citizen  or  a 
foreigner,  or  whether  we  are  dealing  with  a  foreign  or  a  domes- 
tic business  or  corporation.  The  problem  is  solved  very  much 
as  in  the  case  of  the  resident  citizen. 

6.  Shall  a  non-resident  alien  be  taxed  on  his  property  or  inco7ne 
in  the  state? 

In  international  relations,  here  again,  the  principle  of  poUt- 
ical  allegiance  has  been  abandoned,  and  that  of  location  has 
been  substituted.  It  is  the  almost  universal  custom  for  states  to 
levy  a  tax  on  incomes  arising  within  their  borders,  irrespective  of 
the  question  whether  the  recipient  fives  abroad  or  is  a  foreigner. 
The  income  tax  law  of  1894  in  the  United  States  formed  no  ex- 
ception. The  difficulty  arises  in  the  practical  enforcement  of  the 
law,  where  the  property  or  the  source  of  income  does  not  con- 
sist of  tangible  property. 

In  state  and  local  taxation  the  problem  is  comparatively 
simple  as  regards  tangible  property,  which  is  taxed  where 
it  is  located.  But  in  the  case  of  intangible  property,  not  capable 
of  a  situs,  the  question  arises  whether  it  should  follow  the  dom- 
icile of  the  owner,  and  to  that  extent  be  beyond  the  jurisdiction 
of  the  taxing  power;  or  whether  the  intangible  property  may  not 
be  declared  to  have  at  least  an  economic  situs  in  connection 
with  the  tangible  property  on  which  it  is  based  or  which  it 
represents.  In  so  far  as  corporate  securities  are  concerned,  this 
question  will  be  treated  in  a  subsequent  chapter.  In  the  case 
of  earnings  from  business,  since  there  must  generally  be  an 
office  or  an  agent  in  the  state  through  which  the  earnings  are 
received,  the  alien  (or  foreign  business  or  corporation)  is  to 
that  extent  no  longer  a  non-resident.  But  even  here  the  prin- 
ciple of  economic  interest  is  clearly  applicable. 

In  the  case  of  the  inheritance  tax  international  complications 
have  recently  assumed  important  dimensions.  In  the  British 
empire  the  difficulty  has  become  especially  acute  in  view  of 
the  high  inheritance  taxes  levied  simultaneously  by  the  mother 
country  and  by  the  states  of  Australasia  or  South  Africa.  At 
the  last  imperial  conference  in  London  this  was  made  the  sub- 
ject of  urgent  representation  by  New  Zealand;  but  the  British 
government  could  not  see  its  way  to  abandon  the  large  revenues 
now  derived  on  the  estates  of  non-resident  citizens. 

Of  recent  years  the  problem  of  double  taxation  has  also  be- 


IH 


A 


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ESSAYS  IN   TAXATION 


DOUBLE  TAXATION 


123 


If 


come  acute  in  the  United  States  in  the  case  of  the  inheritance 
tax  which  is  now  so  widespread.^    At  first,  as  in  the  case  of  the 
general  property  tax,  while  real  estate  was  usua  ly  taxed  only 
in  the  state  of  its  sihis,  most  of  the  commonwealths  taxed  not 
only  all  the  personal  property  of  resident  decedents  but  also 
such  personal  property  of  non-resident  decedents  as  was  ac- 
tually or  technically  within  the  state,  as  moneys  or  securities 
in  the  local  banks  or  deposit  companies,  or  other  evidences  of 
debt.    Some  states  even  went  further  and  taxed  the  securities 
of  corporations  organized  under  their  laws,  even  though  the 
decedent  was  a  non-resident  and  the  secunties  were  in  some 
other  state.    In  this  way  there  was  the  possibihty  of  not  only 
double,  but  triple  or  quadruple  taxation.    For  if  the  citizen  of 
state  A,  whose  entire  fortune  consisted  of  railroad  bonds,  hap- 
pened to  die  in  state  B,  leaving  on  deposit  in  state  C  the  securi- 
ties of  a  railroad  organized  in  state  D  but  ^^tually  operating  m 
state  E,  his  whole  estate  might  be  taxable  by  each  of  thetive 
states.    A  case  actually  occurred  a  few  years  a^o  m  New  York 
where  a  decedent's  estate  was  compelled  to  pay  no  less  than 
four  taxes  to  different  states  on  the  same  portion  of  the  estate^ 
About  one-half  of  the  American  commonwealths  still  tollow 
the  old  method.     Several  states,  however,  now  endeavor  to 
avoid  double  taxation  by  maintaining  the  prmciple  that  per- 
sonal property  should  be  taxed  only  at  the  domicile  of  the  de- 
cedent.2     others,  again,  have  adopted  this  prmciple  only  m 
part     Maine  and  Vermont,  for  instance,  allow  a  resident  dece- 
dent's estate  credit  to  the  extent  of  taxes  imposed  on  the  same 
inheritance  by  another  state.     As  to  non-resident  decede^^^^ 
however,  their  personal  property  m  the  state  is  still  taxable, 
but  only  to  the  extent  that  the  amount  of  tax  may  exceed  the 
amount  imposed  by  the  state  of  the  decedent  s  domicile.     A 
few  states,  again,  have  a  reciprocal  provision.    Massachusetts 
for  instance,  allows  a  credit  for  taxes  paid  to  other  states,  but 
onlv  if  the  law  of  such  other  state  contains  a  similar  reciprocal 
provision.    Finally  in  a  few  states  we  find  retaUatory  provisions 
Connecticut,  for  instance,  taxes  the  stock  or  registered  bonds  of 
domestic  corporations  to  non-resident  decedents  only  when  the 

'.Suit J;  tkall;  Idaho,  Kentucky,  Louisiana,  Maryland,  Minne- 
sota    Mis^uri,  Montaia,  Nebraska,  New  York,  North  D^^^^^^^ 
Pennsylvania,  South  Dakota,  Tennessee,  Texas,  Utah,  Virginia,  Washing 
ton,  West  Virginia  and  Wyoming. 


state  of  residence  taxes  similar  securities  of  its  own  corporations 
when  owned  bj'^  a  decedent  of  Connecticut. 

This  whole  subject  was  carefully  considered  by  a  committee 
of  the  National  Tax  Association,  which  reported  a  so-called 
model  law  in  1911.^  The  committee  recommended  the  adoption 
of  the  simple  rule  that  the  tax  should  be  imposed,  in  the  case  of 
residents,  upon  all  their  intangible  property  and  upon  such 
tangible  property  as  was  within  the  state;  but  that  in  the  case 
of  non-residents  the  tax  should  be  imposed  only. on  the  tangible 
property  within  the  state.  The  New  York  law  of  1911  followed 
this  recommendation  closely  and  limited  the  taxable  property 
of  non-residents  to  tangible  property  which  was  defined  as 
"  corporeal  property  such  as  real  estate  and  goods,  wares  and 
merchandises,  and  shall  not  be  taken  to  mean  money,  deposits 
in  banks,  shares  of  stock,  bonds,  notes,  credits  or  evidences  of 
an  interest  in  property  or  evidences  of  debt."  -  The  same 
principle  has  been  adopted  in  the  Massachusetts  law  of  1912. 
Were  all  the  states  to  follow  the  same  rule,  the  situation  would 
be  simplified.  In  the  meantime,  however,  in  default  of  a  fed- 
eral compulsion  or  of  an  interstate  agreement,  the  possibility 
of  double  taxation  is  by  no  means  eliminated.  Residents  of  a 
large  financial  centre  like  New  York  are  especially  exposed  to 
simultaneous  taxation  on  the  securities  of  foreign  corporations,^ 
and  will  remain  so  unless  a  provision  is  adopted  as  in  Switzer- 

1  Addresses  and  Proceedings  of  the  Fourth  International  Conference  of  the 
International  Tax  Association,  Columbus,  1911,  p.  279  et  seq.  As  to  the 
change  of  name  from  International  to  National  Tax  Association,  cf. 
supra,  p.  20,  note. 

2  The  history  of  the  New  York  law  is  typical.  The  original  law  of  1885 
did  not  tax  the  personal  property  of  a  non-resident  decedent.  An  amend- 
ment of  1887  was  designed  to  accomplish  this,  but  the  law  was  so  worded 
that  the  result  ensued  only  when  the  decedent  also  owned  real  estate  within 
the  state.  In  1892,  however,  this  condition  was  abrogated,  and  from  1892 
to  1911  the  revenue  from  the  tax  on  the  personal  property  of  non-resident 
decedents  amounted  to  from  one-ninth  to  one-twelfth  of  the  entire  proceeds 
of  the  tax.  This  deficit  was,  however,  more  than  made  good,  under  the 
law  of  1911,  by  an  increase  of  the  rate.     Cf.  the  following  chapter. 

» We  are  told,  for  instance,  that  the  securities  of  about  450  large  cor- 
porations are  dealt  in  on  the  stock  exchange  of  New  York.  Of  these,  32 
are  incorporated  in  New  York,  84  in  New  Jersey,  70  in  Massachusetts, 
33  in  Michigan,  33  in  Maine,  27  in  Pennsylvania,  21  in  Illinois,  and  14  in 
New  Hampshire.  In  all  these  states,  except  Pennsylvania,  a  tax  is  imposed 
on  the  stock  of  such  corporations  when  owned  by  a  decedent  of  New  York. 
Cf.  Annual  Report  of  the  Comptroller  of  the  State  of  New  York,  Albany,  1912, 
p.  xiii. 


i 


124 


ESSAYS  IN  TAXATION 


DOUBLE  TAXATION 


125 


land  or  as  in  Maine  and  Vermont.  Moreover,  it  is  not  very 
nrobable  that  the  Western  states  which  suffer  from  absentee 
oS=rship  will  agree  to  abandon  the  taxation  of  the  secunt.es 
of  railroads  owned  in  the  East.  As  long  as  the  present  condi- 
tions continue  it  is  most  desirable  that  some  mterstate  arrange- 
ment be  effected  whereby  only  such  proportion  of  the  securities 
be  taxed  as  corresponds  to  the  mileage  or  other  criterion  of 

nroDertv  within  the  state. 

^om  the  above  review,  it  is  evident  that  the  ques  ion  where 
a  tax  ought  to  be  imposed  involves  a  rather  simple  theoretical 
problem  and  many  very  difficult  practica  problems     It  s  the 
same  with  almost  every  question  of  taxation.    As  a  matter  of 
nrinciDle  it  is  easy  to  decide  that  a  man  should  be  taxed  ac- 
cord ng  to  his  facuUy;  as  a  matter  of  practice  it  is  no   so  ea^ 
to  apily  the  principle  of  faculty  in  the  actual  tax  system.    So 
we  have  found  that  in  the  case  of  double  taxation  due  to  con- 
Tcts  of  jurisdiction  the  ideal  principle  is  that  of  economic  in- 
te  est  or  economic  allegiance,  modified  in  a  few  ca^es  by  that  oi 
political  allegiance.    The  difficulty  arises  when  we  attempt  to 
embody  this  principle  in  equitable  a.ssessments. 
T we  obseL  the  legislation  of  the  most  Pjof  ™ Jf""" 
tries,  we  find,  especially  as  regards  internal  or  federal  re^bons, 
a  distinct  tendency  toward  the  realization  of  this  principle. 
EcoSmS  interests^are  divided  between  the  Pjces  of  lo-^o" 
of  domicile  and  of  residence.     However  differently  various 
states  may  measure  the  relative  importance  of  ea^h  there  is  a 
steady  progress  toward  the  recognition  of  the  principle,     in 
tie  cL  of  real  estate  the  solution  is  obvious;  m    he  case  of 
intangible  personalty,  of  business  earnmgs  and  of  '"terest  rom 
loans  the  problems  are  far  more  complicated     To  work  put  the 
Xtion  '  for  each  kmd  of  tax  would  take  us  too  far  afield     But 
U  cZTot  be  too  strongly  emphasized  that  >n/«le'-al  ^t'ltes  no 
satisfactory  system  of  taxation  can  be  attamed  until  two  condi- 
tSns  are  realized.    We  need,  in  the  first  place,  a  s-,bstant,a 
Septate  agreement  to  pursue  the  same  general  Po'-^y 'n^!^ 
of  conflicting  jurisdiction;  and  we  need,  m  the  second  place, 
a  virtual  ac^tance  of  the  doctrine  of  economic  interests  in 
taxation.    When  once  these  conditions  exist,  it  vnU  make  com- 
paratively little  difference  how  the  pnnciple  is  nterpreted.    For 
ff  it  is  everywhere  interpreted  in  the  same  spirit,  there  can  be 
•  For  a  study  of  the  practical  problem  as  applied  to  the  corporat'O"  tax, 
see  ^m!  fhap^r  viii,  L.  iv.    Cf.  in  general  the  monograph  of  Walker. 


little  double  taxation;  and  with  increasing  experience  we  may- 
expect  to  find  closer  and  closer  approximation  to  strict  justice 
in  the  application  of  the  principle.  In  international  relations 
we  are  still  very  far  removed  from  the  ideal;  in  internal  taxa- 
tion— federal,  state  and  local — ^the  drift  is  unmistakably  in  the 
right  direction.* 

'  The  recent  enormous  increase  in  the  rates  of  the  income  tax  and  the 
inheritance  tax  in  all  countries  and  the  development  of  these  taxes  in  the 
American  commonwealths  have  brought  the  problems  of  interstate  double 
taxation  to  the  fore.  For  a  discussion  of  some  recent  complications  see  an 
article  by  the  present  writer  "The  Taxation  of  Non-Residents  in  the  New 
York  Income  Tax"  in  The  BulUlin  of  the  National  Tax  Association,  vol.  v 
(1920),  pp.  40-50.  The  British  Income  Tax  Commission,  of  1920  after  care- 
ful consideration,  recommended  relief  from  double  income  tax  within  the 
Empire,  but  held  that  as  between  Great  Britain  and  a  foreign  country 
reciprocal  arrangements  would  be  necessary.  The  United  States  income 
tax  law  however,  now  permits  the  deduction  of  any  similar  tax  levied  by  a 
foreign  government.  The  League  of  Nations  has  now  taken  up  the  general 
subject  of  double  taxation,  and  has  arranged  for  a  committee  report.  A 
preliminary  Memorandum  on  the  subject  was  handed  in  by  Basil  P. 
Blackett  in  1921. 


THE  INHERITANCE  TAX 


127 


■■■!    ■ 

ti 


CHAPTER  V 


THE  INHERITANCE  TAX 

The  inheritance  tax,i  j^^  now  understood  in  most  countries, 
is  essentially  the  product  of  modern  democracy.    It  wa^,  indeed, 
not  unknown  to  antiquity.    In  Rome  the  vice^ma  hereditatium, 
a  tax  of  a  twentieth  part  of  inheritances,  was  imposed  at  the 
beginning:  of  the  empire  to  pay  the  pensions  of  the  veteran  sol- 
diers    In  the  middle  ages  the  relief  and  the  Mnot  were  exacted 
bv  the  overlord  in  return  for  the  privilege  of  succeedmg  to  the 
possession  of  property.    But  while  the  influence  of  the  mediaeval 
idea  is  still  to  be  seen  in  a  few  of  the  continental  countries  where 
the  payment  is  regarded  as  made  for  the  privilege  of  succession, 
the  tax  is  almost  everywhere  of  independent  and  comparatively 
recent  origin.     In  Holland,  in  France  and  even  m  England, 
parts  of  the  existing  inheritance  taxes  are  survivals  of  the  sys- 
tem of  charges  on  transfers  and  transactions.-   In  many  English- 
speaking  states  the  term  probate  duiies  is  still  employed,  signi- 
fying that  the  origmal  conception  was  a  charge  for  the  privilege 

irr  M  West  The  Inheritance  Tax  in  Columbia  Studies,  1893,  2d  ed., 
IQOS-  A  W  Soward  and  W.  E.  WiUan,  The  Taxation  of  Capital  London, 
}^\LI"ii^nron  P^  75-78  a  bibliography  of  the  British  death  duties); 
XTE^^oftsZern  und  Erbschaftsrefor^,  2d  ed.  1877;  Eschenbac^^^ 
EZcht^eform  Jnd  Erhschaftssteuer,  1891;  Kriiger  Dte  Erbschaf^s^^, 
1889;  P.  Aude,  De  Vimpot  sur  les  mutations  VarJ^ces^^^'  1896  K 
Seven6  Impot  sur  les  succesdms,  MontpeUier,  1900,  Garelli,  Limposta 
^c^sorL  1896;  and  several  articles  by  Schanz  in  Finanz  Arch v  vols  xv- 
x™The  earii^t  book  on  the  subject  is  the  anonymous  Ueber  Erbschafts- 
steuer  oder  lachende  Erben-gebuhr,  Erlangen,  1790. 

For  the  United  States  see  A.  W.  Blackmore  and  H.  Bancroft,  The  In- 
h^tance  Tax  Law  containing  all  American  Decisions  and  existing  SUitutes, 
^s5Z  1912;  and  H.  Bancroft,  Inheritance  Taxes  for  Investors,  Boston, 

^^2  Cf^'llaensel.  "Die  mittelalterlichen  Erbschaftssteuem  in  England" 
in  Deutsche  Zeitschrift  fur  Kirchenrecht,  vols,  xix,  xx;  and  his  L  impot  sur  les 
successions  en  Angleterre,  Moscow,  1907. 

126 


of  having  the  will  probated;  and  in  some  places  the  various  forms 
of  the  inheritance  tax  are  included  among  the  stamp  taxes,  or 
taxes  on  transactions.  But  in  most  countries  the  older  idea  has 
been  abandoned.  The  inheritance  tax  is  to-day  found  primarily 
in  democracies  like  those  of  England,  Switzerland,  Australia 
and  America;  and  in  other  countries  its  development  has  gone 
hand  in  hand  with  the  spread  of  democratic  ideas. 

It  may  be  asked  why  democracy  should  favor  the  inheritance 
tax.  The  answer  depends  upon  the  point  of  view  from  which 
we  regard  democratic  tendencies.  J[f  we  say,  as  some  believe, 
that  the  trend  of  democracy  is  necessarily  toward  socialism] 
the  answer  is  plain:  the  inheritance  tax  is  imposed  because 
democracy  is  jealous  of  large  fortunes.)  But  if,  on  the  other 
hand,  we  hold  with  the  less  pessimistic  critics  that  modern 
democracies  are  endeavoring  simply  to  do  away  with  the  abuses 
that  have  come  down  to  us  from  the  aristocracies  of  the  past, 
we  may  claim  that  the  inheritance  tax  is  only  a  means  of  secur- 
ing equality  in  taxation  and  of  realizing  the  principle  of  ability 
to  pay.  Because  the  tax  has  frequently  been  urged  by  those 
who  are  opposed  to  large  fortunes,  it  has  usually  been  overlooked 
that  it  may  be  defended  on  purely  economic  grounds  as  in  com- 
plete harmony  with  the  general  principles  of  equitable  taxa- 
tion. 

The  earliest  argument  for  the  inheritance  tax  had  its  origin 
in  Bentham's  plan  to  abolish  intestate  inheritance;  that  is,  to 
provide,  when  there  was  no  will,  for  the  devolution  of  the  prop- 
erty to  the  state.  1  The  title  of  the  essay  is  explained  in  the 
following  problem: 

^  "What  is  that  mode  of  supply  of  which  the  twentieth  part 
is  a  tax,  and  that  a  heavy  one,  while  the  whole  would  be  no 
tax,  and  would  not  be  felt  by  anybody?  " 

The  solution  of  the  problem,  according  to  Bentham,  lay  in 
the  abolition  of  intestate  succession  except  in  the  case  of  im- 
mediate relatives.  To  this  he  added  the  limitation  of  the  power 
of  bequest  of  testators  without  direct  heirs.  The  old  principle 
of  escheat  was  to  be  extended  to  include  the  inheritances 
or  bequests  then  going  to  collateral  relatives.    But  Bentham 

JThe  full  title  is  "Supply  without  Burden,  or  Escheat  mce  Taxation, 
bemg  a  Proposal  for  a  Saving  of  Taxes  by  an  Extension  of  the  Law  of 
^.scheat,  mcludmg  Strictures  on  Collateral  Succession  comprised  in  the 
Budget  of  7th  December,  1795."  In  Jeremy  Bentham,  Collected  Works, 
Bownng's  edition,  ii.,  p.  585. 


Vj-'*' 


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129 


claimed,  further,  that  the  state  should  have  aa  equal  share  in 
the  sums  going  with  or  without  a  will  to  such  close  relatives  as 
grandparents,  uncles  and  aunts,  and  perhaps  nephews  and 
nieces,  as  well  as  a  reversionary  interest  in  the  succession  of 
childless  direct  heirs  without  prospect  of  cliildren.^ 

Bentham  held  that  this  was  not  a  tax,  and  that  precisely 
in  this  fact  lay  its  chief  advantage,-that  of  "unburthen- 
someness,"  or,  as  we  would  say,  freedom  from  oppressiveness. 
1  According  to  the  general  principles  of  human  nature,  said  he, 
a  man  is  led  in  the  case  of  a  tax  on  successions  to  look  upon 
the  whole  of  what  is  left  to  him  as  his  own,  of  which  he  is  then 
called  upon  to  give  up  a  part.  But  if  under  the  law  regulating 
successions  he  knows  that  nothing,  or  only  a  small  share  is 
due  him,  Bentham  claimed  that  he  would  suffer  no  hardship. 
''For  hardship  depends  on  disappointment;  disappointment 
upon  expectation,  and  if  the  law  of  succession  leaves  him  noth- 
,  ing,  he  will  not  expect  anything."  2  . 

Exaggerated  as  Bentham's  distinction  undoubtedly  is,  it 
I  contains  a  kernel  of  truth;  namely,  that  there  is  no  such  thing 
'  as  a  natural  right  of  inheritance,  and  that  the  extension  of 
intestate  succession  to  collateral  relatives  is  under  existing 
social  conditions  defensible  only  to  a  very  limited  extent. 
Whatever  may  have  been  the  original  family  theory  of  prop- 
erty it  may  be  argued  with  some  force  that  the  bonds  of  the 
wider  patriarchal  family  life  have  been  considerably  loosened 
in  modern  times,  and  that  the  family  consciousness  extends 
nowadays  only  to  the  nearest  relatives.  .       .,     .         ,, 

While  Bentham  looked  upon  the  matter  primarily  from  the 

1  The  plan  is  defined  to  be  "the  appropriating  to  the  use  of  the  public  all 
vacant  successions,  property  of  every  denomination  included,  on  the  failure 
of  near  relations,  will  or  no  will,  subject  only  to  the  power  of  bequest  m 
respect  of  the  half  of  whatever  property  would  be  at  present  subject  to  that 

^°^As  he  puts  it  in  another  place:  "The  riddle  begins  to  solve  itself:  a 
part  taken  and  a  sense  of  burthen  left;  the  whole  taken  and  no  such  effect 
produced;  the  effect  of  a  part,  gnvater  than  the  effex^t  of  a  whole;  the  old 
Greek  paradox  verified,  the  part  greater  than  the  whole  SuffeT  a  mass  of 
Droi>ert.y  in  which  a  man  has  an  interest  to  get  into  his  hands,  his  expect.a- 
tion,  his  imagination,  his  attention  at  least  fa.stens  upon  the  whole. 
Take  from  him  afterward  a  part  .  .  .  the  parting  with  it  cannot  but  excite 

something  of  the  sensation  of  a  loss Take  from  him  now  (I  should 

not  say  take),  but  keep  from  him  the  whole,  so  keeping  it  from  him  that 
there  shall  never  have  been  a  time  when  he  expected  to  receive  it;  aU 
hardship,  all  suffering,  is  out  of  the  case." 


point  of  view  of  escheat,  it  was  but  a  step  to  extend  the  argu- 
ment, and  to  say,  as  many  writers  now  do,  that,  since  it  is  ex- 
ceedingly difficult  to  draw  a  sharp  line  where  the  family  con- 
scious^iess  ends,  it  is  more  just  and  more  practicable  for  the 
state(to  take  away  a  small  part  from  direct  relatives  and  an 
increasingly  larger  sum  from  the  more  remote  relatives.  The 
tax,  in  other  words,  would  be  graduated  according  to  the  degree  . 
of  relationship.  What  was  originally  nothing  but  an  extension 
of  escheat,  thus  grew  into  the  idea  of  a  graduated  collateral 
inheritance  tax.  Even  Bentham  himself,  although  protesting 
against  the  use  of  the  word  tax,  virtually  advocated  a  graduated 
tax  when,  as  we  have  seen,  he  proposed  the  exemption  of  direct 
heirs;  the  confiscation  of  fifty  per  cent  from  grandparents, 
uncles  and  aunts;  and  the  seizure  of  the  whole  in  case  of  intes- 
tacy. Thus  the  extension-of-escheat  argument,  which  was 
meant  originally  to  apply  only  to  intestacy,  has  been  made  to 
include  also  a  limitation  of  the  power  of  bequest. 

A  supposed  variation  of  this  line  of  reasoning  is  seen  in  what 
is  called  the  theory  of  state  co-heirship  or  co-partnership.  It 
originated  with  Bluntschli,  who  used  the  expression  staatliches 
Miterbrecht,  and  has  found  its  way  into  some  recent  treatises. 
Its  most  vigorous  recent  defender  is  Andrew  Carnegie,  who  is  as 
enthusiastic  about  a  progressive  inheritance  tax  as  he  is  opposed 
to  an  income  tax.^  Sometimes  Bentham  is  cited  as  the  origi- 
nator of  the  doctrine,  but  this  is  a  mistake.  As  Dr.  West  so  well 
puts  it: — 

"Bentham's  plan  was  to  abolish  intestate  inheritance  except  be- 
tween immediate  relatives,  to  restrict  the  power  of  bequest  of  testa- 
tors having  no  direct  heirs,  and  to  give  the  state  a  part  of  the  property 
of  decedents  in  certain  cases.  He  called  the  system  which  he  pro- 
posed an  extension  of  escheat,  and  based  it  not  upon  any  right  of  in- 
heritance in  the  state,  but  upon  the  absence  of  any  reason  for  the 
operation  of  intestate  inheritance  between  individuals  not  closely  re- 
lated. It  is  therefore  a  mistake  to  call  Bentham  a  representative  of 
the  theory  of  state  co-heirship.  But  later  writers  have  combined  with 
his  argument  the  thought  that  the  state  should  inherit  property  from 
individuals  because  of  what  it  does  for  them  during  their  lives.  The 
state  is  sometimes  represented  as  a  larger  family;  according  to  Umpf en- 
bach,  the  bond  of  kinship  between  distant  relatives  loses  itself  in  the 
whole  nation,  which  therefore  inherits  the  property  of  individuals  as 

*  Mr.  Carnegie  stated  that  the  "American  republic  is  the  partner  in 
every  enterprise  where  money  is  made  honorably."  Cf.  Seligman,  Progres- 
sive Taxation,  2d  ed.,  1908,  p.  322. 


V 


m 


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131 


I 


the  family  inherits  the  property  of  its  members.    Such  expressions  as 
"Zwever,  must  be  regarded  as  -^-P\-f  ^^^^^^^^^ 
tific.    The  st^te  may  acquire  property  by  escheat  but  not  by  mhent 
ance      Inheritance  impUes  kinship,  and  the  modern  state  is  not  a 
geneiic  association.   The  representation  of  the  state  as  co-he,r  is  eithe 
a  mere  figure  of  speech  (and  as  such  it  is  as  old  a^  Phny),  or  else  it 
resX  from  a  co^sion  of  inheriUnce  and  escheat,  v^-^^^f^^^.^ 
not  a  matter  of  pubUc  law;  it  is  for  P^-^^^- ,^,f  ^^^^^^^ 
inheritance  shall  be  permitted  between  individuals,  ^nd  jor  pubhc 
law  to  ordain  that  where  inheritance  ends  escheat  shall  begm.  f 

We  now  come  to  the  second  theory,  which  may  be  called 
the  socialistic  or  diffusipn-of-wealth  theory.    It  ^^  ^^^^  ^^^^^ 
the  doctrine  that  it  is  the  function  of  government  to  use  the 
power  of  taxation  as  an  engine  oi ^^od^l^evam^ionmc^^^^ 
the  gro^vth  of  large  fortunes  and  m  brmging  about  a  more 
equal  distribution  of  wealth.  ^ 

In  its  origin  this  theory  was  not  sociahstic.  John  S^art 
Mill  accepted  Bentham's  reasoning,  but  developed  it.  bince 
he  did  not  consider  the  right  of  inheritance  as  necessarily  in- 
volved in  the  private  ownership  of  property  he  desired  to 
extend  the  abolition  of  intestate  succession  to  direct  heirs  a^ 
well  as  to  collateral  relatives.  Moreover,  even  m  the  case  of 
Twill,  no  one,  he  thought,  was  justified  n  demanding  more 
than  a  fair  competence.    His  plan  was  as  follows  :— 

"That  no  one  person  should  be  permitted  to  acquire  by  inheritance 
more  than  the  amount  of  a  moderate  independence.  In  case  of  in- 
S^tacy  the  whole  property  to  escheat  to  the  state:  which  should  be 
l^So  male  a  just  and  reasonable  provision  for  descendants,  that 
^  such  a  provision  as  the  parent  or  ancestor  ought  to  have  made,  the  r 
ckcumLtances,  capacities,  and  mode  of  bringing  up  being  considered. 

This  argument  is  not  necessarily  sociahstic;  but  it  is  per- 
haps open  to  question  on  other  grounds.  It  may  be  regarded 
as  opposed  to  the  family  theory  of  property,  which  even.m  its 
narrower  sense,  assumes  that  as  a  man  acquires  property 
krgely  in  order  to  leave  it  to  his  children,  for  whom  he  ought 
to  provide,  there  is  reasonable  ground  for  ^eman^^^/^^^  P^' 
l  petuity  of  the  means  of  family  support.  Dema  of  the  right 
'  of  inheritance  by  direct  heirs  thus  seems  to  involve  an  attack 
upon  the  unity  of  the  family.    On  the  other  hand,  the  right 

1  Political  Science  Quarterly,  viii.,  p.  436. 

2  Political  Economy,  book  v.,  chap,  ix.,  sec.  i.    C/.  book  n.,  chap,  n,  sees. 


m.,  iv. 


of  inheritance  within  the  family  has  already  been  largely  modi- 
fied by  the  freedom  of  bequest;  and  if  a  man  is  at  liberty  to   ) 
give  away  his  whole  fortune  to  outsiders,  we  cannot  well  speak  / 
of  a  family  right.    In  parts  of  continental  Europe,  indeed,  we 
have  the  survival  of  the  old  idea  in  the  institution  of  compulsory 
children's  share  {vortion  legitime,  Pflichttheilsrecht) .     Even  in 
the  United  States  some  of  the  commonwealth  laws  prohibit 
the  bequeathing  of  more  than  a  certain  portion  of  the  estate  to 
charitable  or  public  uses  when  there  is  a  child,  a  widow  or  a 
parent.     But,  as  a  general  rule,  in  English-speaking  countries  I 
the  right  of  bequest  is  free.    It  is  well  known  that  inheritance 
IS  older  than  bequest,  and  that  the  latter  system  was  introduced  ' 
into  the  Roman  law,  not  to  limit  inheritance,  but  to  provide 
heirs  in  default  of  near  relatives.     The  modem  right  of  free 
bequest  is,  therefore,  really  opposed  to  the  older  family  idea 
of  property,  which  takes  shape  in  the  assertion  of  the  right  of 
mhentance.    It  thus  becomes  a  very  difficult  question  to  de- 
cide how  far  inheritance  may  be  demanded  as  of  right.    Never- 
theless, it  may  be  said  that  most  thinkers,  as  well  as  the  mass 
of  the  pubhc,  would  still  to-day  maintain  the  custom  of  in- 
heritance, not  indeed  as  a  natural  right  or  as  a  necessary 
consequence  of  the  right  of  private  property,  but  as  an  in- 
stitution that  is  on  the  whole  socially  desirable.*" 

While  there  is  some  scientific  justification  for  the  doctrine 
as  originally  expounded,  it  is  unquestionable  that  most  of  its 
defenders  plant  themselves  squarely  on  the  ground  that  it  is 
the  function  of  the  state  to  check  the  aggregation  of  wealth 
into  a  few  hands,  and  to  provide  for  the  equalization  of  for- 
tunes. These  writers  would  put  a  limit  not  only  to  the  amount 
of  wealth  acquired  through  inheritance  or  bequest,  but  to  the 
amount  acquired  in  any  manner.  No  fortunes  should  exceed 
a  definite  sum.  Such  a  doctrine  is  very  distinctly  socialistic. 
Those  who  are  not  prepared  to  accept  socialistic  premises 
and  socialistic  methods  of  reasoning  cannot  acknowledge  the 
validity  of  the  diffusion-of-wealth  argument.  ' 

While  the  premises  may  thus  be  regarded  as  wrong,  the  con- 
clusion may  nevertheless  l)e  right,  for  the  same  conclusion  may 
conceivably  be  drawn  from  utterly  dissimilar  premises.  Just  as 
1  The  proposition  that  inheritances  not  due  to  the  saving  of  the  decedent 
should  be  taxed  at  higher  rates  is  advanced  by  E.  Rignano,  Di  un  socialismo 
iri  accordo  colla  dottrina  economica  liberate,  Turin,  1901,  and  Per  una 
nforma  sodalista  del  diritto  successorio,  Bologna,  1920.  Cf  his  "A  Plea 
no1Q^^''oAo^''^''''''°"''^  Democratization"  in  The  Economic' Journal,  xxix 


132 


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133 


f 


it  has  been  elsewhere  shown  that  progressive  taxation  may  be 
upheld  by  decided  opponents  of  socialism/  so  it  can  be  shown 
beyond  dispute  that  the  inheritance  tax  may  be  supported 
through  entirely  different  arguments  by  those  who  oppose  the 
doctrine  of  the  diffusion  of  wealth.  Brushing  aside,  therefore, 
the  socialistic  doctrine  as  inadequate  and  unsound,  let  us  exam- 
ine these  other  arguments. 

Theso^c^ed  cost-of-service  theory,  which  is  occasionally 
found,  treats  the  inheritance  tax  simply  as  a  fee.  The  probate 
courts  are  a  source  of  expense  to  the  government  and  a  source 
of  special  benefit  to  those  that  utilize  their"  services.  What  is 
more  reasonable,  then,  than  that  those  who  receive  the  special 
benefit  should  defray  the  cost? 

This  argument,  however,  would  justify  only  very  light 
charges,  and  it  would  result  not  so  much  in  an  inheritance  tax 
as  in  a  system  of  probate  fees.  Such  probate  fees  are  occa- 
sionally found;  ^  but  as  soon  as  they  exceed  the  cost,  the  theory 
is  no  longer  applicable.  The  probate  duty  in  England,  for  in- 
stance, soon  outgrew  its  original  character  of  a  fee.  Another 
objection  to  this  theory  is  that  logically  the  charge  ought  to 
be  regressive,  not  proportional  or  progressive;  that  is,  since  it 
costs  proportionally  less,  to  probate  a  large  sum  than  a  small 
sum,  the  rate  ought  to  be  lower  on  a  large  inheritance  than  on 
a  small  one— or,  at  all  events,  it  ought  not  to  grow  with  the 
size  of  the  inheritance.  As  a  matter  of  fact,  the  inheritance 
tax  of  1889  in  Wisconsin  was  regressive.^ 

A  somewhat  more  substantial  theory  is  that  which  con- 
siders the  inheritance  tax  as  the  price  of  a  special  privilege. 
It  is  regarded  not  so  much  as  a  fee  paid  to  defray  the  cost  of 
government  services  as  a  charge  proportioned  to  the  advantages 
that  accrue  to  the  recipient  of  the  inheritance.  From  the  legal 
point  of  view,  this  has  much  to  recommend  it.  In  the  United 
States,  for  instance,  if  regarded  as  a  tax  on  property,  the  charge 
would  conflict  with  the  constitutional  provision  found  in  many 

1  See  Seligman,  Progresdve  Taxation  in  Theory  and  Practice,  2d  ed.  (1908), 

p.  142. 

2  So  in  the  American  commonwealths,  as  Wisconsin,  Minnesota,  Illinois 

and  New  Hampshire. 

3  Estates  not  exceeding  $3,000  were  exempt;  up  to  $500,000  they  paid 
one-half  of  one  per  cent;  on  the  excess  above  this,  one-tenth  of  one  per  cent. 
The  charge  was  declared  to  be  "in  lieu  of  fees,"  but  it  was  held  to  be  a  tax, 
and  therefore  unconstitutional  because  applicable  only  to  one  county.  76 
Wis.  469.    See  West,  op.  di.y  p.  77. 


commonwealths,  requiring  all  property  to  be  taxed  equally. 
If  a  general  property  tax  were  levied,  and  then  an  additional 
inheritance  tax  were  imposed,  we  should  have  technically  un- 
equal taxation  of  some  property.  Again,  the  tax,  if  imposed 
by  the  federal  goverimient,  would  militate  against  that  section 
of  the  constitution  which  requires  all  direct  taxes  to  be  appor- 
tioned according  to  population.  Accordingly,  many  of  the 
American  states  have  contrived  to  uphold  the  constitutionality 
of  the  tax  only  by  declaring  it  to  be  a  tax  on  the  devolution  of 
property.  It  is  declared  to  be  a  tax  not  on  wealth,  but  on  the 
transfer  of  wealth.  So  the  Louisiana  inheritance  tax  was  origi- 
nally upheld  by  the  federal  Supreme  Court  as  a  simple  regulation 
of  inheritance.^  But  since  the  federal  jgovernment  possesses  no 
constitutional  power  to  regulate  inheritances,  the  federal  in- 
heritance tax  was  sustained  as  being  neither  such  a  regulation 
nor  a  direct  tax  on  the  land,  but  an  excise  on  the  right  to  suc- 
ceed to  the  ownership  of  property.^ 

From  the  economic  point  of  view,  there  is  a  partial  justifica- 
tion for  this  contention.  It  is  indeed  true  that  if  the  inheritance 
tax  is  to  be  regarded  as  an  indirect  tax  on  transactions  or  trans- 
fers, it  might  be  declared  obnoxious  to  the  general  tendency  of 
modern  theory  to  restrict  the  scope  of  taxes  on  acts  and  trans- 
actions to  their  narrowest  limits.  But  this  opposition  to  taxes 
on  economic  phenomena,  as  we  shall  see  later  ^  has  been  pushed 
too  far.  Again,  to  regard  the  tax  as  a  charge  on  the  mere  priv- 
ilege of  succession,  is  in  reality  to  merge  it  with  the  theory  to  be 
discussed  in  the  next  paragraph,  because  of  the  undoubted  fact 
that  the  result  of  the  privilege  of  succession  is  to  enhance  the 
ability  of  the  recipient.'* 

We  come  then  to  the  theory  which  regards  the  inheritance 
tax  as  a  direct  tax  on  the  recipient  of  the  inheritance.  If 
we  grant  that  the  basis  of  taxation  is  the  faculty  of  the  in- 
dividual, it  is  evident  that  any  addition  by  inheritance  to  the 
wealth  of  the  individual  increases  his  ability  to  pay.^)  If  we 
grant,  further,  that  the  best  test  of  faculty  is  the  revenue  of 
the  individual,  it  is  clear  that  this  accretion  to  his  revenue  is 
of  a  peculiar  character.  Income,  as  the  term  is  commonly 
employed,  denotes  a  regular  periodic  return;  but  an  inheri- 
tance is  an  irregular,  a  spasmodic,  a  chance  return.    In  a  logical 

^  Mager  vs.  Grima,  8  How.  490.  2  Scholey  vs.  Rew,  23  Wall.  331. 

^  Cf.  infra,  chap.  ix. 

*  As  to  the  relation  between  privilege  and  ability,  cf.  infra,  chap,  x,  sec.  3. 


J/ 


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I 


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I 


income  tax  there  is  no  room  for  such  accidental  or  fortuitous 
revenues.  Yet  they  clearly  add  to  the  ability  of  the  individual, 
just  as  the  chance  gains  from  speculation  undoubtedly  increase 
the  faculty  of  the  taxpayer.  From  this  point  of  view,  the 
inheritance  tax  may  best  be  defended  by  the  accidental,  or 
fortuitous-income  argument. 

It  may  be  claimed  that  there  are  possible  cases  where  this 
argument  is  inapplicable.  Thus,  after  a  man's  death,  his  widow 
or  children  may  have  to  depend  entirely  on  the  income  from 
his  property,  where  before  his  death  they  enjoyed  not  only 
this  simi  but  also  the  additional  income  due  to  his  personal 
exertions.  The  family  ability  to  pay  may  be  diminished,  not 
increased.  It  may  be  answered  that  the  state  deals  ^vith  in- 
dividuals, not  with  families,  and  that  the  individual  members 
now  have  incomes  where  before  they  had  none.  And  even  if 
we  concede  this  claim,  the  difficulty  can  be  met  by  exemptuig 
a  certain  amount,  and  imposing  a  progressive  tax  on  the  re- 
mainder. For  in  proportion  as  the  family  income  was  derived 
from  property,  rather  than  from  the  labor  of  the  head  of  family, 
the  share  due  to  his  influence  becomes  correspondingly  smaller, 
and  the  loss  due  to  his  absence  will  be  less  keenly  felt;  while, 
on  the  other  hand,  the  family  expenses  themselves  are  dimin- 
ished by  his  death.  Finally,  in  proportion  as  the  inheritance 
goes  to  self-supporting  direct  heirs  or  to  collateral  relatives, 
it  may  be  maintained  with  truth  that  there  is  a  decided  increase 
in  tax-paying  ability. 

When,  therefore,  we  Have  a  system  of  income  taxes,  the  in- 
heritance tax  may  be  regarded  as  a  supplementary  tax  to  reach 
the  real  ability  of  the  individual.  Moreover,  it  may  be  regarded 
as  a  convenient  method  of  applying  the  principle  of  differentia- 
tion in  the  taxation  of  income.  It  is  now  commonly  recogni^ 
that  incomes  from  property  should  pay  a  higher  rate  thanjn- 
comes  from  labor.  Instead  of  making  a  difference  in  the  rates 
to  reach  this  end,  the  proportional  income  tax  may  be  supple- 
mented by  a  property  tax;  or  where  this  is  for  any  reason  un- 
desirable, by  the  inheritance  tax.  The  latter  would  then  serve 
the  double  purpose  of  reaching  not  only  accidental  incomes, 
but  also  property  incomes,  since  all  inheritances  take  the  shape 
of  property. 

Even  in  those  states  where  the  chief  direct  tax  is  that  on 
general  property,  the  inheritance  tax  may  be  defended  on  the 
accidental-income  theory.    For  in  so  far  as  property  is  at  all 


an  adequate  test  of  faculty  in  taxation,  it  is  simply  a  mode  of 
estimating  the  regular  revenue  or  income.  Accidental  income 
is  as  little  taken  note  of  in  a  property  tax  as  in  an  income  tax. 
In  fact,  as  between  the  two  systems,  an  inheritance  tax  is 
more  necessary  to  supplement  the  former  tax  than  the  latter. 

An  additional  theory  which  has  been  advanced  more  re-  ! 
cently  is  the  so-called  back-tax  theory.    Since  general  property  | 
taxes  are  to  a  large  extent  evaded  during  life,  it  is  said  to  be  no  f 
more  than  just  that  the  property  should  be  made  to  pay  when  i 
the  tax  cannot  be  evaded.    But  in  this  case  it  is  the  property  | 
of  the  decedent,  rather  than  the  abiUty  of  the  heir,  that  is  con- 
sidered.   Moreover,  the  validity  of  the  argument  is  questionable 
chiefly  because  it  is  well-nigh  impossible  to  prove  the  relation 
between  the  amount  of  the  inheritance  tax  and  the  aggregate  of 
taxes  evaded  during  life.    In  the  United  States,  for  example, 
taxes  on  realty  are  generally  paid;  it  is  the  tax  on  personalty 
that  is  evaded.     The  inheritance  tax  ought  then  to  take  the 
shape  only  of  a  tax  on  the  successions  to  personal  property. 
As  an  actual  fact,  this  was  for  some  years  the  case  in  New  York 
and  several  other  states  in  the  direct  inheritance  tax.    The 
reasoning,  therefore,  does  not  apply  to  real  estate  at  all.   Finally, 
in  proportion  as  other  taxes  are  substituted  for  the  personal 
property  taxes,  the  argument  falls  away.    Where  there  is  a 
property  tax  or  an  income  tax,  there  may  well  be  some  pro- 
vision for  an  inventory  of  the  estate  after  death  (as  in  Switzer- 
land and  Germany)  with  severe  penalties  for  the  evasion  of  back 
taxes.    But  such  a  provision  is  entirely  independent  of  the  in- 
heritance tax. 

The  theory  sometimes  advanced  ^  that  the  inheritance  tax 
is  to  be  regarded  as  a  capitalized  income  tax  paid  once  and  for 
all  at  the  close  of  life,  instead  of  in  small  amounts  during  each 
year,  is  not  so  strong.  In  the  first  place,  the  existing  tax  system 
either  does,  or  does  not,  reach  the  income  or  property  of  the 
living  taxpayer.  If  it  does,  as  it  ought  to  do,  to  capitalize  what 
has  already  been  paid  involves  double  taxation.  If  it  does  not, 
the  tax  is  still  objectionable  on  the  score  of  inequality,  because 
when  two  people  with  the  same  fortune  die  at  different  ages 
and  pay  the  same  tax,  the  amount,  if  regarded  as  a  capitalized 
income  tax,  would  mean  a  very  divergent  rate  of  income  tax. 
If  the  tax  payable  by  A,  who  has  enjoyed  his  income  forty 

*  Bastable,  Public  Finance,  p.  526. 


11 


HUM 


136 


ESSAYS  IN  TAXATION 


THE  INHERITANCE  TAX 


137 


years,  is  equivalent  to  the  capitalization  of  a  five  per  cent 
income  tax,  the  amount  payable  by  B,  who  has  enjoyed  his 
income  only  ten  years,  would  be  tantamount  to  a  twenty 
per  cent  income  tax.  An  inheritance  tax,  from  this  point  of 
view,  would  be  grossly  unjust.  This  objection,  due  to  the 
varying  frequency  of  the  transfer,  was  first  made  by  Adam 
Smith,  but  is  applicable  only  when  the  tax  is  considered  as 
a  tax  on  the  estate  as  the  whole.  According  to  the  accidental- 
income  argument,  the  frequency  of  transfer  is  immaterial;  for 
the  tax  is  paid  each  time  by  a  different  person.^ 

The  accidental  income  argument  regards  the  inheritance  tax 
as  a  personal  tax;  the  privilege-of -inheritance  theory  regards 
it  as  an  impersonal  tax.  In  the  one  case  it  is  a  tax  on  the  in- 
dividual; in  the  other  a  tax  on  the  thing — i.  e.  the  inheritance 
or  the  privilege  of  inheritance.  The  one  theory  results  in  the 
imposition  of  the  tax  on  the  share  of  the  recipient;  the  other 
theory,  while  possibly  leading  to  the  same  result,  is  a  tax  sus- 
ceptil)le  of  being  interpreted  as  involving  the  imposition  of  the 
tax  on  the  estate  as  a  whole. 

The  logical  defence  for  the  inheritance  tax  is  thus  the  acci- 
dental-income argument  as  supplemented  by  the  privilege-of- 
inheritance  argument.  Where  the  tax  is  proportional  this 
makes  no  difference,  for  the  sum  of  the  shares  is  equal  to  the 
entire  estate.  But  where  we  have  a  graduated  tax,  the  difference 
is  marked.  The  higher  rates  on  the  larger  amounts  obviously 
result  in  greater  revenue  when  the  tax  is  imposed  on  the  estate 
than  if  levied  on  the  shares.  But  if  A  receives  $10,000  from  a 
$50,000  estate,  and  B  receives  a  like  amount  from  a  million- 
dollar  estate,  it  does  not  comport  with  justice  from  the  individ- 
ual point  of  view  that  B  should  l)e  taxed  ten  times  as  much  as  A 
simply  l)ecause  the  rate  on  a  million  dollars  happens  to  be 
ten  times  that  on  $50,000.  This  principle  of  taxing  the  share 
as  well  as  the  estate  is  now  gradually  being  recognized.  Eng- 
land pursues  l)oth  plans,  taxing  the  estate  as  a  whole  through 
the  estate  duty,  and  the  separate  shares  through  the  legacy  and 
succession  duties.     In  the  United  States  the  federal  tax  is 

1  Some  states  exempt  the  second  devolution,  if  it  takes  place  within  a 
certain  number  of  years.  Chili  fixes  the  term  at  ten  years.  See  West, 
op.  dt.y  p.  33.  In  Great  Britain  since  1014  relief  is  afforded  in  case  of  "  quick 
succession"  by  granting  an  allowance  of  50%  if  the  second  death  occurs 
within  1  year,  40%  within  2  years,  30%  within  3  years,  20%  within  4  years, 
and  10%  within  5  years. 


imposed  on  the  estate  while  most  of  the  commonwealth  taxes  are 
levied  on  the  shares.^  A  few  states  like  Rhode  Island  employ 
both  methods. 

Granting  the  desirability  of  the  tax,  we  are  at  once  con- 
fronted by  the  problem  of  graduated  or  progressive  taxation. 
Graduation  of  the  tax  according  to  relationship  has  met  with 
well-nigh  universal  acceptance;  graduation  of  the  tax  according 
to  amount  has  given  rise  to  more  controversy.  This  question  ] 
has  been  fully  discussed  in  another  place  -  with  the  conclusion 
that  the  theory  of  progression  is  more  applicable  to  the  inherit- 
ance tax  than  to  any  other  part  of  the  fiscal  system;  and  that, 
whether  we  base  our  demand  on  the  limitation-of-inheritance 
theory,  the  faculty  theory  or  the  compensatory  theory,  some 
scale  of  progression  is  both  desirable  and  practicable. 

The  inheritance  tax  to-day  scarcely  needs  defence.  It  is 
found  in  almost  every  country;  and  the  more  democratic  the 
country,  the  more  developed  is  the  tax.  In  some  of  the  Cana- 
dian provinces,  in  the  Australasian  states,  in  the  Swiss  cantons, 
in  England  itself,  the  rates  are  not  only  progressive,  but  highly 
progressive.  The  recent  reforms  in  England  are  fully  described 
in  another  chapter.^  In  the  United  States  also,  there  is  now  a 
decided  movement  toward  the  progressive  inheritance  tax. 
The  collateral  inheritance  tax  is  virtually  the  product  of  the 
last  two  or  three  decades.  Up  to  1890  it  existed  in  only  six 
states,^  but  between  1890  and  1900,  it  was  adopted  by  fifteen 
additional  states,  making  twenty-one  in  all.^  During  the  next 
decade  this  number  was  increased  by  seventeen  states  ^  and  in 

^  For  a  defence  of  taxing  the  share  instead  of  the  entire  estate  see  the 
Report  of  the  Special  Tax  Commission  of  New  York  of  1907,  of  which  the 
author  was  a  member.    Cf.  especially  the  section  on  the  Inheritance  Tax. 

2  Cf.  Seligman,  Progressive  Taxation,  2d  ed.  (1908),  pp.  319-322. 

^  Infra,  chap.  xvi. 

*The  date  when  first  imi)osed  is  put  in  brackets:  Connecticut  [1889], 
Delaware  [1869],  Maryland  [1845],  New  York  [1885],  Pennsylvania  [1826], 
West  Virginia  [1887]. 

^  California  [1893],  Illinois  [1895,  although  it  existed  for  Cook  county 
alone  since  1887],  Iowa  [1896],  Maine  [1893],  Massachusetts  [1891], 
Michigan  [1893-1894,  and  again  from  1899],  Minnesota  [1897,  although  an 
earlier  tax  had  existed  from  1875  to  1886],  Missouri  [1895-1898  and  again 
in  1899],  Montana  [1897],  New  Jersey  [1892],  North  Carolina  [1897,  al- 
though an  earlier  tax  had  existed  from  1847  to  1874],  Ohio  [1893],  Tennessee 
[1891],  Vermont  [1896]  and  Virginia  [1896,  although  an  earlier  tax  had  ex- 
isted from  1844  to  1884]. 

•Arkansas  [1901],  Colorado  [1901],  Idaho  [1907],  Kansas  [1909],  Ken- 
tucky [1906],  Louisiana  [1904,  although  there  existed  from  1828  to  1877 


\Y 


138 


ESSAYS  IN  TAXATION 


THE  INHERITANCE  TAX 


139 


I 


"' 


the  following  decade  by  six  states.  ^  The  collateral  inheritance 
tax  is  therefore  at  present  [1921]  lacking  only  in  Alabama 
(where  it  existed  from  1848  to  1868),  Florida  and  South  Caro- 
lina The  tax  was  declared  unconstitutional  in  six  states,  but 
the  constitutional  objections  were  in  every  case  obviated  by 
later  laws  as  indicated  in  the  preceding  notes. 

The  direct  inheiitance  tax  came  somewhat  later.  It  was 
first  introduced  timidly  and  with  insignificant  rates,  and  fre- 
quently applied  only  to  personal  property.  Gradually  the 
rates  were  increased,  the  exemptions  were  reduced  and  the 
tax  was  made  applicable  to  real  estate  as  well.  The  tax  was 
first  imposed  in  New  York  in  1891,  but  by  the  end  of  the  century 
it  had  spread  to  six  states.^  During  the  next  decade  eighteen 
states  '  and  in  the  following  decade  eighteen  more  states 
were  added  to  the  list.  As  a  consequence  the  direct  inheritamje 
is  now  [19211  found  in  all  the  states  except  six:  Alabama,  Florida, 
Maryland,  Pennsylvania,  South  Carolina  and  Texas. 

As  to  the  rates,  which  are  naturally  higher  m  the  collateral 
taxes,  the  most  interesting  recent  development  had  been  the 
gradual  spread  of  the  progressive  principle.  The  first  case  m 
which  that  principle  was  applied  was  the  direct  tax  of  Ohio  ot 
1894,  which  was  declared  unconstitutional  for  that  reason  by 
the  state  court  in  the  following  year.^ 

and  again  from  1894  to  1899  a  tax  applicable  only  to  foreign  heirs],  Ne- 
braska [19011,  New  Hampshire  [1905,  although  an  earlier  tax  had  existed 
from  1878  to  1.%^^^  North  Dakota  [1903],  Oklahoma  [1908],  Oregon  1903], 
s3h  Dakota  [1905],  Texas  [1907],  Utah  l^^OJl.  Washington  UmWi^ 
consin  [1903,  although  an  earher  tax  had  existed  from  1899  to  1902]  and 

^^TrizonaTl912].  Indiana  [1913],  Mississippi  [1918],  Nevada  [1913],  New 
Mexico  [1919],  and  Rhode  Island  [1916].  ,„„^   i.,. 

2  Louisiana  in  1899,  Michigan  in  1894,  Minnesota  in  1886,  Missouri  m 
1898,  New  Hampshire  in  1882  and  Wisconsin  in  1902. 

3  The  date  when  first  imposed  is  put  m  bracket^:  Connecticut     897] 
Illinois  [1895],  Michigan  [1899],  Montana  [1897],  New  York  [1891]  and 

^  Mn  ?m^SoJado,* Nebraska,  Utah  and  Washington  joined  the  ranks; 
in  1903  Oregon,  Wisconsin  and  Wyoming;  in  1904  Louisiana;  in  1905 
CaHfomia^  Minnesota  and  South  Dakota;  in  1907  Idaho,  M^sachusett^ 
and  West  Virginia;  in  1908  Oklahoma;  and  in  1909  Arkansas,  Kansas  and 

Tenne^ee.^  Maine;  in  1912  Arizona;  in  1912  Georgia,  Indiana  and  Nevada; 
in  1914  New  Jersey;  in  1916  Kentucky,  Rhode  Island  ^nd  Virginia;  m 
1917  Delaware,  Missouri,  North  Dakota  and  Vermont;  m  1918  Mi^i»- 
sippi  and  Virginia;  in  1919  Kansas,  New  Hampshire,  New  Mexico  and  Ohio. 
•  State  vs.  Ferris,  53  Ohio  State,  314. 


In  the  same  year,  1895,  the  progressive  principle  was  applied 
to  the  collateral  inheritance  tax  by  Missouri  and  Illinois.  The 
Missouri  law  was  overthrown  by  the  state  court  although  for 
other  reasons.^  But  the  Illinois  law,  of  a  far  more  radical 
character,  was  upheld,  not  only  by  the  state  court  but  by  the 
federal  Supreme  Court  in  what  has  become  a  leading  case.^ 
For  it  settled  the  principle  that  progressive  taxation  is  not  a 
denial  of  the  equal  protection  of  the  laws  demanded  by  the 
constitution,  and  thus  made  it  difficult  for  any  state  court  to 
annul  a  progressive  tax  because  of  some  vague  provision  in  the 
state  constitution.  When  the  same  question  arose  in  Wisconsin 
as  applicable  to  the  direct  inheritance  tax  the  Wisconsin  court 
stated  that  the  decision  of  the  federal  Supreme  Court  was  con- 
clusive.^ 

As  a  result  of  this  decision  by  the  Supreme  Court,  and  in 
part  also  as  a  consequence  of  the  highly  progressive  inheritance 
tax  temporarily  imposed  by  the  federal  government  during  the 
Spanish  war  and  lasting  from  1898  to  1902,^  the  progressive 
principle  spread  rapidly  throughout  the  country.  At  the 
present  time  (1921)  most  of  the  states  levying  a  direct  inheri- 
tance tax  enforce  the  progressive  principle.  The  rates  rise  from 
1  to  l}4%  in  Tennessee;  from  1  to  2%  in  Illinois  and  Maine; 
from  3^  to  3%  in  Mississippi;  from  1  to  3%  in  Idaho,  Indiana, 
Kentucky,  Montana,  New  Jersey,  Rhode  Island,  West  Virginia 
and  Wisconsin;  from  1  to  4%  in  Connecticut,  Delaware,  New 
York,  North  Dakota,  Ohio  and  South  Dakota;  from  2  to  4%  in 
Colorado  and  Massachusetts;  from  1  to  43/^%  in  Minnesota; 
from  1  to  5%  in  Kansas,  Missouri,  Nevada,  New  Hampshire, 
North  Carolina,  Ohio,  Vermont,  Virginia    and  Washington; 

1  State  vs.  Switzler;  143  Mo.  245. 

2  Kochesperger  vs.  Drake,  167  111.  122;  Magoun  vs.  Trust  and  Savings 
Bank,  170  U.  S.  283. 

3  Nunnemacher  vs.  State,  129  Wis.  190. 

*  The  federal  tax  applied  only  to  personal  property  over  $10,000.  On 
estates  between  $10,000  and  $25,000,  the  rate  varied  according  to  five 
classes  of  relationship,  from  three-quarters  of  one  per  cent  to  five  per  cent. 
On  estates  from  $25,000  to  $100,000,  these  rates  were  increased  one-half; 
from  $100,000  to  $500,000  they  were  multiplied  by  2;  from  $500,000  to 
$1,000,000  by  2M;  over  $1,000,000  by  3.  On  the  highest  amounts  the  tax 
thus  varied  from  two  and  a  quarter  to  fifteen  per  cent.  The  federal  tax  was 
also  upheld  as  constitutional  in  the  leading  case  of  Knowlton  vs.  Moore, 
178  U.  S.  41.  The  point  in  this  case  was  as  to  whether  the  injunction  of 
uniformity  in  the  constitution  meant  anything  more  than  geographical 
uniformity.    The  court,  by  deciding  in  the  negative,  upheld  the  law. 


I 


140 


ESSAYS  IN  TAXATION 


THE  INHERITANCE  TAX 


141 


I 


from  2  to  5%  in  Texas;  from  3  to  5%  in  Utah;  from  1  to  8%  in 
Arkansas;  from  1  to  10%  in  Oklahoma  and  Oregon;  and  from 
1  to  15%  in  California.  The  maximum  rates  apply  to  inher- 
itances varying  in  the  several  states  from  $100,000  to  $1,000,000. 
The  proportional  tax  is  now  found  only  in  Arizona,  Georgia, 
Michigan,  Nebraska  and  New  Mexico  (at  1%) ;  and  in  Louisiana 
and  Wyoming  (at  2%). 

In  the  collateral  inheritance  tax  the  progression  is  naturally 
somewhat  steeper,  the  maximum  rates  being  applied  to  the 
large  sums  going  to  distant  relatives  or  to  non-relatives.  The 
graduation  rises  to  5%  in  New  Hampshire;  to  G%  in  Arizona  and 
Nebraska;  to  7%  in  Maine;  to  8%  in  Delaware,  Massachu- 
setts, Mississippi,  New  York  and  Rhode  Island;  to  9%  in  North 
Carolina;  to  10%  in  Colorado,  Illinois  and  Oklahoma;  to  12%  in 
Texas;  to  15%  in  Idaho,  Indiana,  Kansas,  Kentucky,  Minne- 
sota, Montana,  Virginia,  Washington,  West  Virginia  and 
Wisconsin;  to  20%  in  Iowa,  North  Dakota,  Ohio  and  South 
Dakota;  to  21%  in  Georgia;  to  24%  in  Arkansas;  to  25%  in 
Nevada  and  Oregon ;  and  to  30%  in  California  and  Missouri. 

Finally  it  might  be  added  that  not  alone  have  the  rates 
been  advanced,  but  the  exemptions  have  been  gradually  re- 
duced. In  the  collateral  inheritance  tax  the  exemptions  are 
now  usually  from  $100  to  $500.  In  the  direct  inheritance  tax 
the  exemptions  are  much  higher,  rising  to  $15,000  in  Missouri, 
Oklahoma  and  West  Virginia;  to  $20,000  in  Illinois  and  Nevada; 
to  $24,000  in  California;  to  $25,000  in  Rhode  Island;  and  to 
$75,000  in  Kansas. 

More  recently  the  fiscal  needs  of  the  Great  War  brought 
about  a  marked  uicrease  in  the  scale  of  graduation  throughout 
the  world.  In  the  United  States  the  federal  estate  tax  rose  m 
1916  to  10%  on  sums  over  five  million  dollars;  in  1917  to  20% 
and  in  1919  to  25%  on  sums  over  ten  millions,  so  that  in  1921 
it  was  possible  for  a  large  estate  going  to  a  distant  relative  to  pay 
as  much  as  55%  in  state  and  federal  taxes.  In  Great  Britain 
where  the  tax  on  shares  through  the  Legacy  and  Succession 
Duties  has  smce  1894  reached  10%,  the  additional  Estate 
Duty  reached  in  1914  the  rate  of  20%  on  estates  over  1  mil- 
Uon  pounds,  and  in  1919,  40%  on  estates  over  2  millions,  thus 
making  a  possiV>le  maximum  of  50%.  In  Germany  by  the 
law  of  1919  while  the  estate  tax  (Nachlass-steuer)  rises  only 
to  5%  on  sums  over  a  million  marks,  the  tax  on  shares  {Erhan- 
Jall-stmer)  reaches  the  rate  of  70%  on  sums  over  IJ^  mil- 


lion marks  going  to  distant  relatives,  thus  making  a  possible 
total  of  75%.  In  France  under  the  law  of  1920  an  estate  of  the 
largest  size  (over  500  million  francs)  is  taxed  up  to  39%  by  the 
im'pdt  sur  U  capital  net  global  de  la  succession,  while  the  addi- 
tional tax  on  shares  (droit  de  mutation)  rises,  in  the  case  of 
relatives  beyond  the  fourth  degree,  to  59%.  In  order  to  prevent 
the  confiscation  of  practically  the  entire  amount  (or  98%),  the 
law  provides  that  in  no  case  shall  the  joint  rate  exceed  80%. 
This  is  the  highest  figure  yet  reached  in  history. 

A  comparison  of  the  recent  fiscal  development  in  demo- 
cratic states  would  not  be  uninstructive.  In  only  three  coun- 
tries does  the  old  general  property  tax  still  survive — in  Switzer- 
land, in  Australia  and  in  the  United  States;  and  in  all  three  the 
system  has  become  so  defective  that  it  has  been  supplemented, 
by  other  sources.  The  Swiss  cantons  first  developed  the  in- 
come tax,  then  the  inheritance  tax,  and  have  only  recently 
been  paying  attention  to  the  corporation  tax.  The  Australian 
colonies  were  first  in  the  field  with  the  inheritance  tax,  later 
developed  the  income  tax,  and  have  scarcely  yet  realized  the 
unportance  of  the  corporation  tax.  The  Ajuerican  common- 
wealths, finally,  were  the  first  to  introduce  the  corporation 
tax,  have  more  recently  turned  their  attention  to  the  inheritance 
tax,  and  have  only  just  begun  to  experiment  with  the  income 
tax.  The  differences  are  suggestive,  but  are  easily  explicable 
when  we  recall  the  economic  and  administrative  conditions  in 
each  country.  With  all  the  variations  in  detail,  it  is  clear  that 
the  democratic  trend  is  in  one  general  direction;  and  it  is  more 
than  probable  that  progressive  inheritance  taxes  will  play  by 
no  means  an  insignificant  role  in  the  fiscal  systems  of  the  future. 


il 


THE  TAXATION  OF  CORPORATIONS 


143 


I 


CHAPTER  VI 

THE   TAXATION   OF   CORPORATIONS 


THE   HISTORY 

In  a  previous  chapter  we  have  considered  the  inadequacy 
and  practical  failure  of  the  general  property  tax.    In  all  ages 
and  in  all  countries  it  has  been  found  almost  impossible  to 
reach  intangible  personalty.    What  has  always  been  a  difficult 
task  has  become  immensely  complicated  to-day  through  the 
growth  of  the  modern  corporation.    At  present,  especially  in 
industrial  countries,  the  far  greater  part  of  the  personalty  in 
the  hands  of  individuals  consists  of  intangible  property— mamly 
of  corporate  securities.    The  first  reform  of  our  direct  taxation, 
therefore,  is  conceded  by  all  to  lie  in  this  direction.    Govern- 
ments are  everywhere  confronted  by  the  question,  how  to  reach 
the  taxable  capacity  of  the  holders  of  these  securities,  or  of  the 
associations  themselves.     Whom  shall  we  tax  and  how  shall 
we  tax  them  in  order  to  attain  a  substantial  justice?    Perhaps 
no  question  in  the  whole  domain  of  fiscal  science  has  been 
answered  in  a  more  unsatisfactory  way.    In  the  United  States 
we  have  a  chaos  of  practice— a  complete  absence  of  principle; 
in  Europe,  with  the  possible  and  partial  exception  of  England, 
the  situation  is  scarcely,  if  at  all,  better.    Moreover,  in  spite  of 
the  generally  recognized  need  of  reform,  there  has  thus  far  been 
no  comprehensive  attempt,  from  the  standpoint  of  theory,  to 
evolve  order  out  of  the  chaos  into  which  the  whole  subject  is 
plunged.^ 

»  A  satisfactory  treatment  of  this  subject  is  still  lacking.  The  EngUsh 
writers  have  paid  little  attention  to  it.  C/.,  however,  J.  Bucham,  The 
Law  relating  to  the  Taxation  of  Fcxreign  Income,  London,  1905,  which  deals 
in  part  with  coniorations.  In  the  American  literature  there  may  be  men- 
tioned H  G.  Friedman,  The  Taxation  of  Corporations  in  Massachusetts 
in  the'Columbia  Studies,  New  York,  1907;  an  article  on  the  same  subject 
by  C  J   Bullock,  in  the  Quarterly  Journal  of  Economics,  vol.  xxi.  (1J07;, 


The  first  requisite  in  any  scientific  investigation  of  this  kind 
is  to  have  the  facts;  for  without  a  knowledge  of  existing  con- 
ditions, any  propositions  for  reform  would  be  valueless.  Never- 
theless, the  facts  of  corporate  taxation  have  never  been  pre- 
sented in  their  entirety.    Given  the  laws,  it  is  necessary  next 

p.  181  et  seq.;  M.  H.  Hunter,  The  Development  of  Corporate  Taxation  in  the 
Stale  of  New  York,  Urbana,  1917;  and  J.  R.  Moore,  Taxation  of  Corpora- 
tions in  Illinois  other  than  Railroads  since  1872,  Urbana,  1913.  The  studies 
on  the  different  classas  of  corporations  and  on  the  special  problems  will  be 
mentioned  below  in  their  projicr  place. 

For  the  facts,  see  Taxation  of  Corporations.  Report  on  Systems  employed 
in  Various  States.  Prepared  under  the  direction  of  the  Industrial  Commis- 
sion. By  G.  Clapperton,  Expert  Agent,  Washington,  1901;  and  especially 
the  monumental  work  in  six  volumes  entitled  Taxation  of  Corporations. 
Report  of  the  Commissioner  of  Corporations  on  the  Systems  of  taxing  Manu- 
facturing, Mercantile  and  Transportation  and  Transmission  Companies, 
Washington,  1909-1915.  This  treats  of  the  situation  as  of  1909,  while  a 
supplementary  volume  covering  the  interval  down  to  1912  appeared  as  a 
Special  Report  on  Taxation  in  1914.  Much  material  will  also  be  found  in 
Carl  C.  Plehn,  Revenue  Syste7ns:  State  and  Local  Governments,  reprinted 
from  the  Census  Report  on  Wealth,  Debt  and  Taxation,  Washington,  1907; 
and  the  still  fuller  Census  volume  entitled  Taxation  and  Revenue  Systems  of 
State  and  Local  Govemtmnts.  A  Digest  of  Constitutional  and  Statutory  Pro- 
visions relating  to  Taxation  in  the  diffnent  States  in  1912,  Washington,  1914. 

In  a  few  of  the  states  we  find  special  treatises  on  the  tax  law  and  tax 
legislation,  devoted  in  whole  or  in  part  to  corporate  taxation.  These  are: 
J.  T.  Davies,  A  Compilation  of  Constitutional  Provisions,  Statutes  and  Cases 
relating  to  the  Assess?7ient  of  Taxes  in  the  State  of  New  York,  New  York,  1886, 
and  again  in  1888;  John  T.  Merrill,  Manual  of  the  Taxation  of  Corporations 
by  the  State  of  New  York,  New  York,  1897;  J.  H.  Hammond,  Taxation  of 
Business  Corporations  in  New  York  State,  New  York,  1901;  H.  M.  Powell, 
Taxation  of  Corporations  in  New  York  for  State  ami  Local  Purposes,  Albany] 
1905;  the  same  author's  Manual  of  Corporate  Taxation  in  New  York  for 
State  Purposes,  New  York,  1907;  F.  M.  Eastman,  Taxation  for  State  Pur- 
poses in  Pennsylvania,  Philadelphia,  1898;  the  same  author's  The  Law  of 
Taxation  in  Pennsylvania,  2  vols.,  Newark,  1909;  C.  C.  Black,  Law  of  Taxa- 
tion with  special  reference  to  its  Application  in  the  State  of  New  Jersey,  2d  ed., 
Newark,  1906;  J.  P.  Dunn,  Jr.,  The  New  Tax  Law  of  Indiana  and  the  Science 
of  Taxation,  Indianapolis,  1892;  F.  M.  Judson,  A  Treatise  upon  the  Law  and 
Practice  of  Taxation  in  Missouri,  Columbia,  1900;  Comjyilalion  of  Tax 
Laws  and  Judicial  Decisions  of  the  State  of  Illinois,  made  by  Albert  M. 
Kales  and  Elmer  M.  Liessmann  [Springfield,  1911]. 

Of  the  general  legal  treatises  on  taxation  only  a  few  are  devoted  partic- 
ularly to  corporations.  The  most  important  is:  J.  H.  Beale,  Jr.,  The  Law 
of  Foreign  Corporations  and  Taxation  of  Corporations,  both  Foreign  and 
Domestic,  Boston,  1904.  In  the  ordinary  treatises,  however,  frequent 
references  are  made  to  corporations.  Cf.  esp.  T.  M.  Cooley,  Treatise  on  the 
Law  of  Taxation,  3d  ed.,  1903;  R.  Desty,  The  American  Law  of  Taxation 
as  determined  in  the  Courts  of  last  Resort,  St.  Paul,  1884;  W.  H.  Burroughs, 


W 


144 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


145 


m 


m 


to  consider  the  interpretation  put  upon  them  by  the  courts. 
Even  then  we  have  only  the  legal,  not  the  economic  view;  for, 
unfortunately,  good  law  is  not  always  sound  economics  It  is 
therefore  advisable  to  subject  the  legal  principles  involved  to 
an  analysis  from  the  economic  point  of  view.    Only  after  such 

A  Treatise  on  the  Law  of  Taxation,  New  York,  1877  new  ed.,  1883;  F.  M. 
Judson  The  Taxing  Power,  State  and  Federal,  in  the  United  btates,  bt.  Louis, 
1903.  C/.  also  the  appropriate  chapters  in  the  encyclopaedic  works  on 
Carpm-ation  Law  by  Cook  (6th  ed.,  1908,  4  vols.) ;  and  by  Thompson  (2d  ed., 

Material  oJcorporate  taxation  wiU  be  found  in  the  histories  of  taxation 
in  the  various  states.    These  are:  W.  M.  Gouge,  Fiscal  Hist^yf  ^'^^^' 
1834-1852,  Philadelphia,  1852;  T.  K.  Worthmgton,  Historical  Sketch  of  the 
Finances  of  Pennsylvania,  Baltimore,  1887;  W.  P^^^y^^^^^^If  ^^^ 
Brief  History  of  Taxation  in  Pennsylvania,  Hamsburgh  1906,  N.  W.  Evans 
A  Histcrry  of  Taxation  in  Ohio,  Cincinnati,  1906;  EW.  Bog^vt  His  ary  of 
Taxation  iri  Ohio,  Columbus,  1912;  F.  A.  Wood,  History  of  Taxation  in 
Vermmt,  New  York,  1894;  M.  H.  Robin.son,  A  Huloryof  Taxation  m  Neu, 
Hampshire,  American  Economic  Association,   1902;  D.  C.  Sowers.   The 
Firmndal  History  of  New  York  State,  Columbia  Studies,  1914;  S.  E  Leland, 
Taxatim  in  Kentucky,  Lexington,  1920;  H.  S.  Hannah,  .4  Financial  History 
of  Maryland,  Baltimore,  1907;  F.  H.  Noble,  Tax«/mn  inlmva:  Histmi^l 
Sketch,  present  Statm  and  suggested  Reforms,  St.  Louis   1897;  J.  E.  Brind- 
lev   Histarii  of  Taxation  in  Iowa,  2  vols.,  Iowa  City,  1911;  E.  J.  Benson, 
Taxation  in  Kansas,  Baltimore,  1900;  J.  E.  Boyle,  The  Financial  History 
of  Kansas,  Madison,  1908;  R.  V.  Phelan,  The  Financial  History  of  Wiscon- 
L,  Madison,  1908;  W.  C.  Fankhouser,  A  Financial  History  of  (-^l^fornm 
Berkeley   1913;  E.  T.  Miller,  A  Financial  History  of  Texas,  Austin,  191b. 
The  financial  histories  of  Jones  on  Connecticut,  Douglas  on  Massachusetts, 
Ripley  on  Virginia,  and  Schwab  on  New  York  deal  with  the  earher  periods, 
anterior  to  the  formation  of  corporations. 

Of  the  earlier  German  literature— and  there  was  none  m  any  other  lan- 
guage-there may  be  mentioned:  Dietzel,  Die  Besteuerung  der  Aktiengesell- 
schaften  in  Verbindung  mit  der  Gemeindebestenreung,  Cologne,  J859;  G.  b. 
Meili  "Rechtsgutachten  iiber  die  Besteuerung  von  Aktiengesellschaften 
in  Zdtschrift  fiir  schweizerische  Gesetzgcbung  und  Rechtspflege,  1882,  p.  489 
et  sea  ■  F  Hecht,  '*Die  staatliche  Besteuerung  der  Aktiengesellschaften  in 
Deutschland,"  in  Finanz  Archiv,  vol.  vii.  (1890),  p.  37  et  seq.;  Schanz,  ''Die 
Besteuerung  der  Aktiengesellschaften  in  den  deutschen  Staaten,  in 
Wochenschnft  far  Aktienrecht  und  Bankwesen,  1892,  no.  20. 

Since  the  first  edition  of  this  book  a  number  of  foreign  studies  have 
appeared.  In  German  there  may  be  mentioned  D.  Feitelberg,  Die  Emkom- 
mensbesteuerung  nicht  physischer  Personen,  Jena,  1900;  Wangemann,  Die 
Heranziehung  der  AktiengeseUschaften  zur  Gemeindeemkommensteuer  m 
Preussen,"  in  Venvaltungsarchiv,  1901,  p.  489;  A.  Dehhnger,  'Die  Besteuer- 
ung der  Aktiengesellschaften  in  Wurttemberg,"  in  Finanz  Archiv,  vol  xxi. 
(1904)  p  499-  F  J.  Neumann,  "Die  Aktien-und  ahnhche  Gesellschaften 
als  Rechts-  und  als  Steuersubjekte,"  in  Annalen  des  Deutschen  Reichs,  1905, 
pp  321  418,  602;  F.  Dinglingcr,  Die  staatliche  und  kommunale  Einkommens- 


an  examination  and  comparison  of  the  facts  of  taxation  in  the 
United  States  and  in  Europe,  will  it  be  possible  to  reach  any 
conclusions  that  may  lay  claim  to  scientific  precision.  Only 
such  conclusions,  arrived  at  through  such  a  method,  should 
be  made  the  basis  for  practical  reforms. 

This  then  is  the  program  of  the  present  series  of  chapters  on 
the  taxation  of  corporations.  The  great  importance  of  having 
the  facts  accurately  stated  leads  me  at  the  outset,  even  at 
the  risk  of  tediousness,  to  an  examination  of  the  history  and  of 
the  actual  conditions  of  such  taxation  in  the  United  States, 
while  the  theory  and  criticism  will  be  reserved  for  future  con- 
sideration.^ 

I.  Early  Taxation  of  Corporations 

During  the  first  two  decades  of  the  nineteenth  century,  banks 
and  insurance  companies  formed  the  chief  examples  of  corpora- 
tions, apart  from  the  numerous  turnpike  roads  and  toll  bridges. 
During  the  twenties  and  thirties  the  development  of  transpor- 
tation facilities  led  to  the  creation  of  many  canal  and  railway 
companies;  and  it  was  not  long  before  many  other  forms  of 
commercial  and  industrial  enterprise  followed  in  the  same 
path  of  incorporation.  The  early  tax  laws  made  no  mention 
of  corporations.  But  as  the  general  property  tax  was  in  vogue 
throughout  all  the  commonwealths,  it  was  tacitly  assumed  that 
the  property  of  artificial  as  well  as  of  natural  persons  was  liable. 
Corporations  were  new  institutions  which  the  legislators  in 
happy-go-lucky  fashion,  tried  to  tax  under  existing  methods, 
whether  they  naturally  belonged  there  or  not.    Our  Solons  had 

besteuerung  der  Aktiengesellschaften  in  Preussen  und  Baden,  Berlin,  1905; 
L.  Blum,  Die  steuerliche  Ausnuizung  der  Aktiengesellschaften  in  Deidschland, 
Stuttgart,  1911;  E.  Steinitzer,  "Zur  Besteuerung  der  Aktiengesellschaften 
in  Oesterreich,"  in  Conrad's  Jahrbiicher,  vol.  83  (1904),  p.  319;  W.  Ger- 
loff,  Die  Kantonale  Besteuerung  der  Aktiengesellschaften  in  der  Schweiz, 
Bern,  1906. 

In  French  and  Italian  we  may  mention  A.  Wahl,  Traite  du  regime  fiscal 
des  societcs  et  des  valeurs  mobilieres,  Paris,  1909;  H.  Truchy,  "Les  valeurs 
mobilieres  et  les  projets  de  r^forme  fiscale,"  in  Revue  d'economie  politique, 
1909,  p.  763  and  1910,  p.  31;  NatoH,  La  personalitd  guiridica  delle  societd 
commerciali  e  Vimposta  di  ricchezza  mobile,  Rome,  1912. 

^  This  chapter,  as  well  as  the  two  immediately  following,  will  contain 
few  direct  references  to  the  laws  and  the  legal  decisions.  For  a  full  state- 
ment of  the  laws  as  they  existed  in  1890  the  reader  is  referre<l  to  the  notes 
in  the  original  articles  in  the  Political  Science  Ouarterly,  vol.  v.,  from  which 
the  present  chapters  are  adapted.  When  the  present  tense  is  used  in  the 
following  pages  it  refers  to  the  conditions  as  they  existed  in  1921. 


*  • 


146 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


147 


II 


neither  the  leisure  nor  the  inclination  to  make  a  more,  careful 

study  of  the  subject. 

The  first  commonwealth  law  which  treated  of  the  taxation 
of  corporations  in  general  was  the  New  York  law  of  1823. 
This  provided  that  "all  incorporated  companies  receiving  a 
regular  income  from  the  employment  of  their  capital"  should 
be  considered  "persons"  liable  to  the  general  property  tax. 
They  were  required  to  make  returns  to  the  county  officers  of 
all  their  property  and  their  capital  stock,  paying  the  tax  them- 
selves and  deducting  it  from  the  dividends  of  stockholders. 
They  might,  however,  commute  the  tax  by  paying  to  the  treas- 
urers of  the  counties  where  they  transacted  business  ten  per 
cent  on  their  "dividends,  profits,  or  income,"  (which  the  legis- 
lator evidently  presumed  to  be  identical).  These  taxes  were 
paid  by  the  county  officers  to  the  state,  and  were  then  credited 
to  the  counties  in  proportion  to  the  amount  of  stock  held  within 
each  county,  after  deducting  the  state  tax. 

In  1825  and  again  in  1828  the  system  was  slightly  changed 
so  as  to  conform  more  closely  to  the  general  property  tax.    The 
tax  was  made  applicable  to  "all  monied  and  stock  corporations 
deriving  an  income  or  profit  from  their  capital  or  otherwise." 
The  real  estate  of  these  corporations  was  separately  taxed;  and 
in  addition,  they  paid  the  property  tax  on  their  capital  stock 
paid  in  or  secured  to  be  paid  in,  deducting  the  amount  paid 
for  real  estate  and  the  stock  belonging  to  the  state  and  to  hter- 
ary  and  charitable  institutions.    Manufacturing  and  turnpike 
companies  paid  on  the  cash  value,  not  on  the  amount,  of  the 
capital  stock;  turnpike,  bridge  and  canal  companies,  whose 
"net  income"  did  not  exceed  five  per  cent  of  the  capital  stock 
paid  in,  were  exempted;  while  manufacturing  and  marine  in- 
surance companies  under  the  same  conditions  might  commute 
by  paying  five  per  cent  of  their  net  income.    It  is  thus  seen  that 
by  this  law  corporations  were  divided  into  different  classes, 
and  that  the  system  followed  was  the  general  property  tax, 
with  the  exceptions  that  if  a  corporation  had  no  profits  it  paid 
no  tax  on  its  stock,  and  that  certain  classes  might  commute  by 
paying  an  income  tax  to  the  local  officials.    This  remained  the 
tax  system,  except  for  banks  and  for  foreign  insurance  com- 
panies, until  the  middle  of  the  century 

In  1853  the  total  exemption  of  non-profit-paying  corpora- 
tions was  abolished  and  all  companies  were  taxed  on  their 
real  estate  and  on  their  capital  stock,  together  with  their  sur- 


plus profits  or  their  reserve  funds  in  excess  of  ten  per  cent  of  the 
capital,  with  the  same  deductions  as  above.    All  corporations, 
however,  whose  profits  did  not  equal  five  per  cent  on  the  capital 
stock  might  commute  by  paying  five  per  cent  on  then-  "net 
annual  profits  or  clear  income."    It  seems  that  very  few  ever 
availed  themselves  of  this  doubtful  privilege,  and  accordingly 
in  1857,  the  law  was  again  changed.    The  principle  of  commu- 
tation was  abandoned;  and  since  there  was  no  distinction  be- 
tween profitable  and  unprofitable  companies,  so  far  as  personal 
property  was  concerned,  all  corporations  were  taxed  on  their 
realty  and  on  the  actual  value  (not  the  amount)  of  their  capital 
stock  plus  the  surplus  profits  or  reserve  in  excess  of  ten  per  cent 
of  the  capital.    In  addition  to  the  previous  deductions  a  further 
abatement  was  made  for  the  capital  invested  in  taxable  shares 
of  other  companies.     The  remainder  was  then  taxed  in  the 
sanae  manner  as  the  other  personalty  and  realty  of  the  county. 
This  remained  the  law  of  New  York,  with  the  exception  of  some 
special  provisions  as  to  banks  and  insurance  companies,  until 
the  recent  changes  in  the  taxation  of  corporations.     These 
changes,  however,  affect  only  taxation  for  state  purposes,  leav- 
ing the  local  taxation  still  governed  by  the  provisions  of  the 
law  of  1857.     Foreign  corporations,  however,  are  taxable  for 
local  purposes,  under  a  law  of  1855,  on  all  sums  actually  in- 
vested in  the  state. 

It  appears,  then,  that  the  New  York  system  was  a  taxation 
of  the  real  and  personal  property  of  corporations  by  the  local 
assessors,  and  that  the  personal  property  was  virtually  defined 
as  the  capital  stock  not  invested  in  real  estate.  In  the  other 
comnaonwealths,  where  corporations  were  taxed  at  all  they 
were  included  in  the  general  property  tax;  and  most  of  the  laws 
lacked  even  such  provisions  as  those  of  the  New  York  statute 
in  reference  to  the  capital  stock.  A  typical  enactment  of  this 
kind  is  the  Connecticut  law  of  1826,  which  provided  simply 
that  the  personal  property  of  a  corporation  should  be  taxed  in 
the  place  where  its  principal  business  was  transacted.  In  Mas- 
sachusetts, on  the  other  hand,  where  the  first  general  law  ap- 
plicable to  manufacturing  corporations  was  passed  in  1832,  only 
the  real  estate  and  machinery  of  corporations  were  taxed.  In 
lieu  of  the  tax  on  personalty  there  was  substituted  the  property 
tax  on  the  corporate  shares  in  the  hands  of  individuals,  a  pro- 
portionate amount  being  deducted  from  each  for  the  part  of 
the  capital  stock  invested  in  machinery  and  in  real  estate.    In 


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II 


the  other  commonwealths,  when  the  corporation  was  taxed,  the 

shares  in  the  hands  of  individuals  were  "f^'^l'y  *^''«'"P*;^  B' 
only  state  which  from  the  very  outset  broke  with  the  principle 
of  the  general  property  tax  was  Pennsylvama,  whose  method 
we  shall  learn  a  little  farther  on.  ,        •    •  i      t  „„, 

With  this  one  exception,  then,  the  early  principle  of  cor- 
porate taxation  was  the  a^essment  of  all  real  and  pe^onal 
property  by  the  local  officials;  corporations,  m  other  words, 
werft^ed  by  the  same  method  as  individuals.  This  primitive 
system  has  been  retained  up  to  the  present  day  by  many  com- 
monwealths for  almost  all  classes  of  corporations;  and  m  several 
states,  indeed,  the  constitutions  require  that  W^^tXTrt 
be  taxed  in  the  same  manner  as  that  of  individuals  The  prac- 
tical defects  of  such  a  system,  however,  have  led  to  numerous 
changes  in  many  of  the  progressive  states,  and  the  tendency 
is  everywhere  away  from  the  original  plan. 

I^a  previous  chapter  we  have  seen  that  the  shortcomings 
of  the  general  property  tax  were  five  in  number;  mequahty 

of  assessment,  failure  to  reach  P^^^^^^^^^'  ^r    vlntiom 
honesty,  regressivity  and  double  taxation.   With  few  exceptions, 
these  objecfions  are"^^  applicable  to  the  taxation  of  corporations 
as  to  that  of  individuals.    All  the  facts  here  to  be  recoun  ed 
set  the  stamp  of  disapproval  upon  the  original  plan.    In  the 
words  of  a  celebrated  report  on  taxation,  this  method  of  asses^ 
ing  corporations  locally  on  their  general  property,  ^is     as  a 
system,  open  to  almost  every  conceivable  objection. 
11.  Development  of  the  Corporation  Tax 
As  a  result  of  these  practical  defects  many  commonwealths 
have  abandoned  in  part,  or  altogether,  the  taxation  of  corporate 
property  by  local  officials.    The  movement  away  from  this 
3nal  position  has  taken  three  directions:  ()  the  property 
of  transportation  companies,  especially  railroads,  has  been  as- 
sessed separately  by  a  special  board  and  -^cordrng  to  wU^ 
defined  rules;  (2)  certain  classes  of  corporations,  beginmng  with 
banks  and  insurance  companies,  but  gradually  including  the  so- 
1  Taxation  of  Railroads  and  Railroad  Secunties.    By  C.  F.  Adams,  Jr, 
W  B  w£ms  and  J.  H.  Oberly,  a  Committee  appointed  at  a  Convention 
I^sttelXld  Commissioned  to  examine  into  and  report  the  methods 
n  IWion  ^  r^^^^^^     RaUroads  and  Railroad  Securities  now  in  use  in  the 
tlrStrrfh:  Union,  as  well  as  in  foreign  countries;  and  ^.r^er  t^ 
report  a  plan  for  an  Equitable  and  Uniform  System  of  such  laxation, 
New  York,  1880,  p.  8. 


called  public-service  cojporations  and  in  not  a  .few  cases  other 
corporations,  have  been  taxed,  not  on  their  property,  but  on 
certain  elements  supposed  to  represent  roughly  their  taxable 
capacity;  (3)  all  corporations  in  general  have  been  taxed  by  a 
uniform  rule,  according  to  principles  varying  more  or  less  in 
the  different  commonwealths. 

The  first  tendency  has  progressed  so  far  that  there  is  now  not 
a  single  commonwealth  which  applies,  for  both  state  and  local 
purposes,  the  primitive  method  of  the  general  property  tax, 
locally  assessed,  to  railroads.  In  1895  there  were  still  nine  such 
states,^  but  in  1912  Rhode  Island  formed  the  only  exception. 
In  that  year,  however,  Rhode  Island  supplemented  the  older 
system  by  a  different  method.  About  two-thirds  of  the  Ameri- 
can states  2  have  broken  away  from  the  original  custom  so  far 
as  to  have  the  railroad  property  assessed  no  longer  by  local 
officials,  but  by  a  state  tax  commission  or  a  state  board  known 
under  other  and  various  names.^  The  tax,  it  is  true,  is  usually 
imposed  at  the  customary  rate  of  the  general  property  tax,  but 
many  of  the  difficulties  of  local  assessment  of  property  have 
been  obviated. 

In  a  few  states  the  departure  from  the  primitive  system  is 
only  very  slight.  Thus  in  Louisiana  although  by  the  constitu- 
tion of  1898  a  state  board  of  affairs  assesses  the  property, 
corporate  real  estate  continues  to  be  taxed  at  the  locality  where 
situated  and  personal  property  at  the  domicile  of  the  corpora- 
tion. And  in  Texas,  while  the  comptroller  of  state  apportions 
the  rolling  stock  to  the  counties,  and  a  state  board  by  a  recent 

^  Louisiana,  New  Mexico,  Oklahoma,  Oregon,  Rhode  Island,  Tennessee, 
Texas,  Utah  and  Washington. 

2  Alabama,  Arizona,  Arkansas,  Colorado,  Florida,  Georgia,  Idaho, 
Illinois,  Indiana,  Iowa,  Kansas,  Kentucky,  Louisiana,  Michigan,  Montana, 
Nebraska,  Nevada,  New  Hampshire,  New  Jersey,  New  Mexico,  Okla- 
homa, Oregon,  South,Dakota,  Tennessee,  Utah,  West  Virginia,  Washington, 
Wisconsin  and  Wyoming.  Delaware,  Mississippi,  Missouri,  Ohio,  North 
Carolina,  North  Dakota,  South  Carolina,  Texas  and  Virginia,  which  also 
use  this  newer  method,  supplement  it  by  special  taxes. 

3  It  is  called  the  board  of  railroad  cormmssioners  in  Tennessee;  state 
board  of  assessors  in  Maine  and  New  Jersey;  state  board  of  affairs  in 
Louisiana;  corporation  commission  in  Virginia;  board  of  state  tax  commis- 
sioners in  Indiana;  board  of  equalization  in  Idaho,  Georgia,  Montana, 
Nebraska,  North  Dakota,  Oklahoma,  Utah  and  Wyoming;  and  state  tax 
commission  in  all  the  remaining  states  except  Florida  (where  the  assess- 
ment is  put  in  the  hand  of  the  attorney  general,  comptroller  and  treasurer) 
and  Texas  (where  it  is  in  part  entrusted  to  the  comptroller). 


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151 


law  appraises  the  franchise,  the  real  estate  of  corporations  is 
still  assessed  in  the  old  way  by  local  officials.    In  most  of  the 
states,  however,  the  policy  of  centralization  of  assessment  has 
proceeded  much  farther.    In  some  of  the  states  which  practice 
this  so-called  ad  valorem  system,  the  state  board  assesses  the 
entire  property.    In  others  it  assesses  the  roadbed,  rolling  stock 
and  all  other"  operative  property,  i.e.  property  actually  used 
for  purposes  of  operation,  leaving  the  remainder  of  the  prop- 
erty to  be  appraised  by  the  local  assessors.     In  still  others  the 
state  board  includes  over  and  above  the  tangible  property  the 
value  of  the  so-called  franchise.    As  soon  as  this  is  done,  how- 
ever, a  departure  is  made  from  the  principles  of  the  general  prop- 
erty tax.    For  although  an  individual  may  be  assessed  to  the 
property  tax  on  his  so-called  intangible  property,  an  attempt 
is  rarely,  if  ever,  made  to  assess  to  an  individual  the  good  will 
of  a  business.    Yet  a  corporate  franchise,  as  we  shall  see  later 
is  in  a  certain  sense,  in  part  at  least  analogous  to  the  good  will 
of  a  business  and  its  value  as  a  piece  of  property  can  be  reached 
only  through  a  consideration  of  the  corporate  earnings,     in 
proportion,  however,  as  the  assessment  of  franchises  acqmres 
greater  importance,  the  simpler  machinery  of  ad  valorem  assess- 
ment becomes  inapphcable,  and  this  method  of  taxation  really 
merges  into  the  one  to  be  discussed  below. 

In  not  a  few  of  the  states  which  levy  the  ad  valorem  tax  the 
so-called  unit  rule  is  followed.    The  first  provision  for  this  seems 
to  have  been  made  in  the  California  constitution  of  1879.    By 
this  is  meant  that  instead  of  the  property  of  the  corporation 
being  valued  piecemeal,  its  entire  value  is  appraised  as  a  unit. 
If  part  of  the  property  is  without  the  state  the  property  is 
none  the  less  valued  as  a  unit,  and  deductions  are  then  made 
to  compensate  for  that  part  of  the  property  which  is  deemed  to 
be  without  the  state.    In  the  case  of  railways  relative  mileage 
is  usually  taken  as  the  criterion.    The  same  rule  is  observed  as 
between  the  various  local  divisions  in  the  state  the  property 
being  assessed  not  by  local  assessors  piecemeal  but  by  a  state 
board  as  a  unit.    The  existence  of  the  unit  rule  is  entirely  irre- 
spective of  the  particular  method  employed  to  reach  the  value 
of  the  entire  property.     Sometimes  only  the  Realty  and  the 
tangible  personalty  of  the  corporation  are  added  together, 
sometimes  the  value  of  the  intangible  personalty  is  added;  some- 
times the  value  of  the  so-called  franchise  is  taken  into  account; 
sometimes  the  result  is  reached  by  ascertaining  the  value  of 


the  capital  stock  or  again  of  the  stock  plus  the  bonds  and  either 
with  or  without  certain  deductions.  But  whatever  the  method 
of  ascertaining  the  value,  the  point  is  that  the  entire  value  of 
the  corporation  is  taken  as  a  unit. 

For  the  reason  mentioned  above,  as  well  as  for  others  to  be 
discussed  later,  this  first  reform  of  railroad  taxation  has  not  been 
completely  satisfactory.  As  a  consequence  a  number  of  im- 
portant commonwealths  have  wholly  or  partially  abandoned 
property  as  the  l)asis  of  assessment.^  The  methods  adopted  by 
them  are  comprised  in  the  second  of  the  three  tendencies  men- 
tioned alcove. 

This  second  movement  away  from  the  property  tax  has  con- 
sisted in  subjecting  particular  classes  of  corporations  to  special 
taxes  on  other  elements  than  their  general  property.  It  will  be 
well  to  discuss  these  classes  in  order. 

1.  Banks 

The  direct  taxation  of  banks  dates  back  to  the  beginning  of 
the  nineteenth  century.  During  the  war  with  England  the 
federal  government  imposed  certain  stamp  duties  on  notes 
issued  or  discounted  by  banks.  But  this  law  of  1813  contained  a 
further  provision  permitting  the  banks  to  compound  for  the 
duty  by  paying  one  and  a  half  per  cent  on  the  amount  of  the 
annual  dividends. 

The  first  state  law  providing  for  a  direct  tax  on  banks  was  the 
Georgia  act  of  1805,  which  levied  a  tax  of  two  and  a  half  per 
cent  on  their  capital  stock  and  one-half  of  one  per  cent  on  their 
circulation.  New  Jersey  followed  in  1810,  with  a  tax  of  one 
and  a  half  per  cent  on  the  paid  up  capital  stock  of  specified 
banks.  The  first  Massachusetts  law  was  the  act  of  1812  which 
imposed  a  tax  of  one-half  of  one  per  cent  on  the  amount  of  their 
capital  stock.  A  more  important  law  was  the  Pennsylvania 
act  of  1814,  for  Pennsylvania  from  the  very  outset  assumed  an 

^  Of  these,  nine  states  use  only  the  new  method — Connecticut,  California, 
Delaware,  Maine,  Maryland,  Massachusetts,  Minnesota,  New  York  and 
Pennsylvania.  Mississippi,  Ohio,  North  Carolina,  Rhode  Island,  South  Car- 
olina, Tennessee,  Texas  and  Virginia  impose  similar  taxes  in  addition  to 
the  ad  valorem  system.  Illinois  uses  the  method  only  in  the  case  of  one 
railroad.  Michigan,  Washington,  Wisconsin  and  Vermont  at  one  time  em- 
ployed the  newer  method,  but  subsequently  reverted  to  the  ad  valorem 
system.  North  Dakota  at  one  time  employed  the  new  method  as  an 
alternative  system  until  it  was  declared  unconstitutional. 


If 


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I 


attitude  different  from  that  of  the  other  states.    According  to 
this  law,  banks  were  taxed  at  the  rate  of  six  per  cent  upon  their 
dividends  or  net  profits;  if  exempted  from  the  national  tax,  the 
rate  was  to  be  eight  per  cent.    In  1824  the  rate  was  definitely 
fixed  at  eight  per  cent,  and  a  few  years  later  the  principle  of 
graduated  taxation  was  introduced.    The  act  of  1835  imposed 
on  banks  of  issue  a  tax  on  dividends,  which  varied  from  eight 
to  eleven  per  cent  as  the  dividends  were  under  sbc  or  over  eight 
per  cent;  and  in  1840  banks  were  also  subjected  to  the  capital 
stock  tax  imposed  on  all  corporations.    In  1849  the  dividend 
tax  was  increased.    In  1850  a  tax  of  four  and  a  half  mills  on 
capital  stock  was  substituted  for  the  earlier  general  tax,  but  m 
1852  this  was  repealed  and  the  old  tax  reintroduced,  which  in 
1859  was  extended  to  banks  of  discount,  deposit  and  savings 
institutions.     In  1861  the  progressive  tax  on  dividends  was 
increased  so  as  to  vary  from  eight  per  cent  if  the  dividends 
were  six  per  cent,  up  to  thirty  if  the  dividends  were  twenty- 
five     In  1866  a  tax  of  one  per  cent  was  imposed  on  capi- 
tal stock,  in  Ueu  of  all  other  taxes  on  the  ciipital  stock  of 
banks,  and  after  some  minor  changes  the  whole^  system  of 
taxing  banks  was  replaced  in  1889  by  the  method  to  be  ex- 
plained below.  .  ,    1  «„«r. 
Ohio  and  Virginia  were  the  only  other  states  which  began, 
and  for  some  time  continued,  to  tax  banks  on  dividends,  although 
several  states,  like  Vermont,  in  chartering  special  banks  some- 
times inserted  a  provision  in  the  charter,  reserving  a  portion 
of  the  profits  or  dividends.    In  Ohio  a  tax  of  four  per  cent  on 
dividends  was  imposed  in  1815,  but  in  1816  the  general  banking 
law  obliged  the  banks  to  set  aside  profits  which  at  the  expira- 
tion of  the  charter  would  amount  to  four  per  cent  of  the  total 
stock.    In  1825  this  charge  was  commuted  into  a  tax  ot  Irom 
two  to  four  per  cent  on  dividends,  and  in  1831  the  rate  was 
raised  to  five  per  cent.    In  1845  banks  were  required  to  pay, 
in  lieu  of  the  tax  on  dividends,  six  per  cent  on  the  prohts,  de- 
ducting expenses  and  ascertained  losses.    Five  years  later  the 
taxation  of  profits  or  dividends  was  abolished,  and  the  banks 
were  henceforth  taxed  at  the  rate  of  the  general  property  tax 
on  the  amount  of  their  capital  stock  and  contingent  fund.    In 
Virginia  the  dividends  tax  did  not  begin  until  1846,  when  the 
banks  were  required  to  pay  one  and  a  quarter  per  cent  on  divi- 
dends    This  rate  was  gradually  changed  until  during  the  Civil 
War  it  reached  seventeen  per  cent.    In  1870  a  new  system  was 


introduced,  based  partly  on  capital  stock,  partly  on  income 
or  dividends  above  $1,500;  but  in  the  following  year  the  present 
method  was  adopted. 

While  Pennsylvania  and  Virginia  were  the  only  common- 
wealths to  retain  dividends  as  the  basis  of  taxation,  a  few  states 
taxed  banks  on  their  capital  stock.  Thus  the  Massachusetts 
tax  of  1812,  changed  in  1828  to  a  tax  of  one  per  cent  on  the 
amount  of  the  capital  stock  actually  paid  in,  remained  in  force 
practically  without  change  until  the  Civil  W^ar,  when  the  state 
banks  were  superseded  by  the  national  banks.  This  tax  was  in 
addition  to  that  levied  on  the  individual  stockholders  but, 
curiously  enough,  it  applied  only  to  the  chartered,  not  to  the 
free  banks.^  In  Louisiana  a  tax  was  imposed  in  1813  on  the 
''stock  in  trade"  of  all  banks;  and  in  Kentucky  a  tax  was  levied 
in  1818  on  the  capital  of  the  branches  of  the  Bank  of  the  United 
States.  In  other  states,  again,  a  special  tax  was  levied  only 
on  the  proportion  of  the  capital  stock  owned  by  non-residents, 
as  in  the  first  Connecticut  law  of  1830,  which  imposed  such  a 
tax  at  the  rate  of  one-third  of  one  per  cent.  In  most  of  the  com- 
monwealths, however,  the  special  state  taxation  of  capital  stock 
came  much  later,  since  the  principle  of  the  property  tax  pre- 
vailed. When  the  capital  stock  was  taxed  at  all,  it  was  simply 
as  representing  the  personal  property,  and  hence  it  was  taxable 
locally  at  the  general  rate  of  the  property  tax.  The  real  estate 
was  taxed  separately,  as  in  New  York,where  the  personal  prop- 
erty tax  was  levied  on  bank  stock  and  was  payable  by  the  cor- 
poration. According  to  the  law  of  1823,^  the  tax  was  assessed 
on  the  par  value  of  the  stock,  but  in  1847  the  basis  was  changed 
to  the  actual  market  value  of  the  stock,  without  deduction  for 
debts.  It  is  worthy  of  note  that  in  North  Carolina,  where  the 
taxation  of  capital  stock  did  not  come  until  1859,  the  rate  of 
the  tax  varied  with  the  dividends. 

Since  the  inception  of  the  national  banking  system  most 
of  the  commonwealths  have  again  changed  their  methods  of 
taxing  banks.  The  history  of  this  change  can  be  well  traced  in 
the  legislation  of  New  York.  According  to  the  laws  mentioned 
above,  banks  were  taxable  on  so  much  of  their  capital  stock 
as  represented  their  personal  property.    Under  these  acts  the 

*  For  a  discussion  of  this  point  see  W.  B.  Stevens,  The  Taxation  of  State 
Banks.     Boston,  186.5. 

2  One  of  the  earliest  discussions  of  the  bank  tax  is  to  be  found  in  S.  M. 
Hopkins,  Speech  on  the  Subject  of  taxing  Bank  Stock.     Albany,  1822. 


I' 


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155 


banks  claimed  exemption  for  that  part  of  their  capital  invested 
in  United  States  bonds;  but  their  claim  was  disallowiid  by  the 
court  of  appeals,  on  the  ground  that  no  unfriendly  discrimma- 
tion  was  thereby  shown  to  the  United  States  as  a  borrower.    In 
1862,  however,  the  national  government  provided  by  law  for 
the  total  exemption  from  state  taxation  of  all  stocks,  bonds 
and  other  securities  of  the  United  States.    The  court  of  appeals 
then  held  that  this  provision  applied  only  to  stock  and  bonds 
issued  after  the  date  of  the  law,  but  that  all  securities  issued 
prior  thereto  were  still  taxable,  according  to  the  state  statute. 
This  decision  was  reversed  by  the  federal  Supreme  Court,  which 
held  that  any  "stock  of  the  United  States  constituting  a  part 
or  the  whole  of  the  capital  stock  of  the  bank  is  not  subject  to 
state  taxation."     The  legislature  then  sought  to  evade  this 
decision  by  enacting  that  banks  should  be  taxable  "on  a  valua- 
tion equal  to  the  amount  of  their  capital  stock,"  with  similar 
deductions  and  exemptions  as  in  the  law  of  1857;  and  the  court 
of  appeals  pronounced  this  law  valid,  on  the  ground  that  the 
tax  was  on  capital  stock,  and  not  on  property.    This  decision 
was  in  turn  reversed  by  the  Supreme  Court,  which  held  the  tax 
to  be  levied  on  the  property  of  the  bank,  and  therefore  subject 
to  deduction  for  non-taxable  investments.     In  18()4  the  na- 
tional banking  act  was  passed,  which  permitted  the  taxation 
of  national  bank  shares  in  the  hands  of  individuals,  but  not  at 
a  greater  rate  than  other  moneyed  capital.    This  gave  the  New 
York  legislature  the  desired  opportunity,  and  in  1865  it  enacted 
a  law  providing  that  all  shares  in  national  banks  should  be  in- 
cluded in  the  valuation  of  the  personal  property  of  individuals. 
The  court  of  appeals  held  this  to  be  valid.    It  must  be  remem- 
bered, however,  that  the  state  banks  were  still  taxed  on  their 
capital.    The  Supreme  Court  of  the  United  States  now  upheld 
the  principle  of  the  taxability  of  shares,  on  the  ground  that  a 
tax  on  the  shares  in  the  hands  of  individuals  was  not  a  tax 
on  the  capital  of  the  bank.    Nevertheless  it  reversed  the  New 
York  decision  on  a  minor  point,  namely,  that  since  the  capital 
of  state  banks  invested  in  national  securities  was  exempt,  a 
tax  on  the  capital  was  not  equivalent  to  a  tax  on  the  share- 
holders, and  hence  to  tax  state  banks  on  their  capital  and  share- 
holders of  national  banks  on  their  shares  constituted  a  dis- 
crimination against  national  banks.    This  decision  led  to  the 
New  York  law  of  1866,  which  abolished  the  taxation  of  bank 
capital  and  provided  for  the  taxation  of  shareholders  of  both 


state  and  national  banks  in  the  same  way,  i.e.,  on  the  value  of 
the  shares,  with  deductions  for  the  capital  invested  in  real 
estate.    The  banks  were  no  longer  taxed  on  their  capital,  but 
were  required  to  retain  the  dividends  from  the  stockholders 
until  the  tax  was  paid.    The  Supreme  Court  sustained  this  law, 
holding  that  no  deduction  should  be  made  from  the  value  of 
the  shares  for  any  part  of  the  bank's  capital  which  might  consist 
of  United  States  bonds.    Later  it  decided  the  state  tax  on  shares 
to  be  valid,  even  if  it  were  collected  from  the  banks.    The  ques- 
tion then  arose  whether  it  was  competent  for  the  shareholder 
to  deduct  the  value  of  his  debts,  as  was  the  case  in  the  taxation 
of  all  other  personal  property.     The  court  of  appeals  decided 
in  1867  in  the  negative,  holding  that  there  could  be  no  deduction 
of  debts  from  the  assessment  of  bank  shareholders.    This  case 
slumbered  for  thirteen  years;  but  in  1880  a  decision  involving 
this  precise  question  was  reversed  by  the  United  States  Su- 
preme Court  on  the  ground  that  "the  prohibition  against  the 
taxation  of  national  bank  shares  at  a  greater  rate  than  that 
imposed  upon  other  moneyed  capital  could  not  be  evaded  by 
the  assessment  of  equal  rates  of  taxation  upon  unequal  valua- 
tions."   The  consequence  was  an  alteration  in  the  New  York 
law,  which  now  in  1880  permitted  the  same  deductions  as  in  all 
other  taxable  property  and  which  provided  for  the  assessment 
of  shares,  whether  owned  by  residents  or  non-residents,  at  the 
place  where  the  bank  was  located.^ 

The  result  of  this  development  was  that  bank  shareholders 
paid  a  large  proportion,  and  in  some  towns  the  greater  part,^ 
of  all  the  taxes  on  personal  property,  and  that  they  alone 
were  unable  to  evade  the  otherwise  so  laxly  executed  tax 
on  personalty.  A  later  attempt  of  the  banks  to  remedy 
this  obvious  inequality  was  frustrated  by  a  decision  of  the 
Supreme  Court  that  the  words  "moneyed  capital,"  in  the 
revised  statutes,  are  practically  confined  to  banks  and  pri- 
vate money  lenders,  and  that  the  imposition  of  a  lower  rate 

^  For  contemporary  views  see  The  State  and  National  Banks.  The  Ques- 
tion of  Taxation,  Albaay,  1864;  Report  of  the  Committee  of  Bank  Officers  of 
the  City  of  New  York  in  relation  to  Bank  Taxation,  New  York,  1875;  T.  J. 
Hillhouse,  Taxation  of  Banks  of  the  Stale  of  New  York,  New  York,'  1880; 
C.  P.  Williams,  The  National  Banks  and  State  Taxation,  New  York,  1887; 
[Seven]  Reports  of  the  American  Bankers'  Association  upon  Bank  Taxation 
New  York,  1875-1889.  ' 

2  In  Albany  the  banks  paid  fifty-eight  per  cent  of  all  taxes  on  personalty. 
New  York  State  Assessors'  Report,  1878,  p.  16. 


156 


ESSAYS  IN   TAXATION 


THE  TAXATION  OF  CORPORATIONS 


157 


■ 


\i 


<i 


ill  If 


of  taxation  on  other  corporations  does  not  invalidate  the  bank 

tax 

The  system  of  taxing  banks  that  had  been  reached  in  New 
York  by  the  close  of  the  nineteenth  century  is  now  general 
throughout  the  United  States.    It  may  be  summed  up  as  the 
separate  taxation  of  the  real  estate  owned  by  the  bank  together 
with  a  tax  paid  by  the  bank  and  then  withheld  from  dividends, 
levied  sometimes  by  local,  but  more  frequently  by  state,  offi- 
cials on  the  value  of  the  shares,  less  the  value  of  the  real  estate 
and  other  exempt  property.    In  only  a  few  states,  Uke  Maine, 
Maryland,  New  Hampshire,  New  Jersey,  Oregon,  Texas  and 
Vermont,  is  the  primitive  method  followed  of  attempting  to 
assess  the  shares  to  the  owner  where  they  reside;  and  even  in 
many  of  these  instances  an  exception  is  made  in  the  case  of 
national  banks  and  of  non-resident  stockholders,  when  the 
tax  is  assessed  to  the  bank  itself.    In  most  states  the  same 
method  is  applied  to  state  and  national  banks.     In  the  eyes 
of  the  law,  the  tax  although  assessed  at  the  bank,  is  generally 
considered  to  be  a  tax  on  the  shareholders,  advanced  by  the 
bank.  As  a  matter  of  fact  the  tax  is  in  most  cases  assessed  in 
the  name  of  the  shareholder,  and  has  even  been  declared  invalid 
if  the  law  does  not  grant  in  specific  terms  the  right  to  collect 
the  tax  again  from  the  shareholder.^    Practically,  of  course, 
it  is  not  a  tax  on  the  shareholders,  because  of  the  familiar  fact 
that  new  purchasers  of  bank  shares  will  escape  the  tax  through 
the  operation  of  the  principle  of  capitalization  of  taxation. 

The  shares  are  generally  taken  up  at  market  or  book  value; 
but  in  some  cases  book  value  is  not  admitted  and  in  others,  arbi- 
trary methods  of  ascertaining  the  value  are  prescribed.  Thus  in 
New  Jersey  the  assessors  until  recently  added  the  capital  stock, 
surplus  and  undivided  profits;  deducted  the  value  of  the  non- 
taxable securities  and  of  the  real  estate;  and  then  divided  the  re- 
mainder by  the  number  of  shares.   The  result  was  an  assessment 

1  The  cases  in  their  order  are  as  follows:  23  N.  Y.  192;  26  N  Y.  163;  2 
Black,  870;  2  Wall.  200;  33  N.  Y.  161;  People  t;s  Weaver,  3  W^U- 573;  4 
Wall.  244;  9  Wall.  353;  36  N.  Y.  59;  Van  Allen  vs.  Assessors,  100  U.  b.  539, 
Mercantile  National  Bank  vs.  New  York,  129  U.  S.  138. 

2  The  Supreme  Court  has  repeatedly  held  that  the  tax  on  the  share- 
holder may  be  required  to  be  paid  by  the  corporation.  Aberdeen  Bank  rs 
ChehaHs  Count v,  166  U.  S.  440;  Merchants'  Bank  tjs.  Pennsylvania,  167 
U.  S.  461;  Cleveland  Trust  Company  vs.  Lander,  1S4  U.  b.  111. 

»  Home  Savings  Bank  vs.  Des  Moines,  205  U.  S.  503. 
*  See  infra,  chap,  viii,  sec.  vi. 


which  is  in  few  cases  even  approximately  equal  to  either  the  mar- 
ket or  the  par  value.^  So  in  Idaho  by  a  law  of  1912  the  surplus 
and  undivided  profits  are  added  to  the  face  value  of  the  shares 
and  the  amount  of  the  capital  invested  in  real  estate  is  then  de- 
ducted. In  some  cases  again,  where  it  is  customary  to  assess 
property  at  only  a  portion  of  its  real  value,  the  law  provides 
that  a  definite  percentage  of  the  market  value  of  the  shares  be 
put  into  the  assessment  list.  In  Iowa,  for  instance,  it  is  twenty 
per  cent;  in  Idaho  forty  per  cent. 

In  most  of  the  states,  even  where  the  assessment  of  bank 
shares  is  fixed  by  a  state  official,  the  proceeds  are  distributed 
to  the  locafities  in  which  the  shareholders  reside.  Some  com- 
monwealths have  enacted  more  detailed  provisions  to  avoid  the 
confusion  arising  from  the  taxation  of  non-residents'  stock.  The 
Massachusetts  law,  for  example,  which  dates  from  1868,  pro- 
vides that  the  assessors  of  a  town  where  a  national  bank  is 
located  shall  omit  from  the  town  valuation  all  shares  held  by 
non-residents,  and  that  the  taxes  paid  by  the  bank  on  these 
shares  shall  be  credited  to  the  state. 

The  system  sketched  above  is  the  one  generally  found  in  the 
United  States.  Since  the  commencement  of  the  twentieth 
century,  however,  a  number  of  states  have  substituted  a  special 
corporation  tax  on  banks  at  a  fixed  or  flat  rate,  in  lieu  of  the 
older  method.  Thus  in  New  York  the  law  of  1901,  as  amended 
in  1903,  provides  for  the  imposition  of  a  tax  of  one  per  cent  on 
the  value  of  the  bank  stock,  which  is  arrived  at  by  adding  to- 
gether the  capital  stock,  surplus  and  undivided  profits  and 
dividing  the  result  by  the  number  of  shares.  Owing  to  the 
lower  rate  there  is  no  deduction  for  the  value  of  the  real  estate, 
nor  is  the  shareholder  entitled  to  any  deduction  for  debts,  as 
is  the  case  in  the  general  property  tax.^  The  tax  is  payable  to 
the  county  officers  and  is  then  distributed  to  the  localities.  In 
California  a'  similar  tax  of  one  per  cent  was  imposed  in  1910, 
with  the  difference  that  the  amount  of  the  real  estate  locally 
taxable  is  deducted,  and  that  the  tax  is  payable  to  the  state. 
The  California  tax  is  in  fieu  of  all  other  taxes  and  licenses, 
state  and  local,  except  the  local  tax  on  real  estate.  In  Connect- 
icut since  1901  the  banks  pay  to  the  state  a  tax  of  one  per  cent 

*  By  a  recent  decision  the  New  Jersey  method  has  been  altered  so  that 
the  market  value  less  the  non-taxable  is  taken  for  assessment  purposes. 

2  A  New  York  case  involving  the  right  to  deny  a  shareholder  deduction 
for  debt  is  now  [1912J  in  the  United  States  Supreme  Court. 


158 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


159 


on  the  market  value  of  the  shares,  less  the  amount  of  the  real 
estate,  but  the  tax  is  then  returned  to  the  towns  in  proportion 
to  their  shareholdings.    The  tax  on  non-resident  shares,  how- 
ever, goes  to  the  town  where  the  bank  is  located.    In  Penn- 
sylvania by  somewhat  earlier  legislation  (namely,  the  laws  of 
1879  and  of  1881  as  amended  in  1889,  1891  and  1897)  the  banks 
may  pay  the  so-called  four  mills  tax  on  the  actual  value  of 
their  shares  or  a  ten  mills  tax  on  the  par  value  of  their  capital 
stock.    In  the  four  mills  tax  the  value  of  the  shares  is  ascer- 
tained by  adding  together  the  paid  in  capital,  surplus  and  un- 
divided profits  and  dividing  the  result  by  the  number  of  shares, 
whereupon  the  bank  is  exempted  from  the  state  tax  on  personal 
property  and  from  local  taxation  on  so  much  of  its  capital  and 
profits  as  is  not  invested  in  real  estate,  but  including  in  the 
exemption  any  bonds  or  mortgages  whether  of  individuals  or 
corporations  held  by  them.^    If,  however,  they  elect  to  pay  the 
ten  mills  tax  on  par  value  they  are  not  relieved  from  the  pay- 
ment of  the  tax  on  mortgages.    Accordingly,  virtually  all  the 
banks  choose  the  four  mills  tax.    National  banks  are  in  any 
case  exempt  from  the  state  tax  on  mortgages.    A  three  per  cent 
net  earnings  tax,  changed  in  1901  to  a  gross  earnings  tax,  apphes 
only  to  unincorporated  banks  without  capital  stock.  In  Delaware 
there  is  a  tax  of  one-fifth  of  one  per  cent  on  the  book  value  of  the 
bank  shares,  paid 'to  the  state  in  Ueu  of  all  state  taxes  except 
franchise  taxes;  and  there  are  also  special  taxes  on  seven  of  the 
older  banks  in  the  state.    In  some  of  the  Southern  common- 
wealths, as  North  Carolina  and  Florida,  we  find  in  addition  to 
the  tax  on  bank  shares  a  license  or  occupation  tax  fixed  accord- 
ing to  the  capital  or  the  business  transacted.    Again,  in  a  few 
states,  especially  in  New  England  where  it  is  customary  to  tax 
the  deposits  of  savings  banks,  we  find  special  taxes  on  bank 
deposits  in  general.    So  in  Connecticut  bank  deposits  are  taxed 
in  the  same  way  as  savings  bank  deposits,  described  below;  and 
in  Maine  banking  companies  pay  one-half  of  one  per  cent  on 
average  amount  of  interest  on  time  deposits  and  deposits  bear- 
ing interest  of  three  per  cent  and  over,  deducting  the  value 
of  federal,  state  and  local  bonds.    In  Vermont  national  bank 
deposits  bearing  more  than  two  per  cent  interest  are  taxed  at 
a  special  rate  of  three-twentieths  of  one  per  cent. 

» This  was  decided  in  Commonwealth  vs.  Clairton  Steel  Co.,  222  Pa. 
293  (1898);  and  People's  Savings  Bank  vs.  Monongahela  Consolidated  C 
and  C.  Co.,  29  Pa.  Superior  Ct.  153  (1908). 


Finally  there  are  a  few  cases  of  special  taxation  on  foreign 
banks.  New  York,  for  instance,  levies  a  tax  of  five  per  cent  on 
the  interest  of  moneys  loaned  or  employed  within  the  state,  and 
Maine  taxes  the  branches  of  foreign  banks  at  the  rate  of  three- 
quarters  of  one  per  cent  on  the  amount  of  business  transacted 
within  the  state.  California,  on  the  other  hand,  taxes  branches 
or  agencies  of  foreign  banks  on  their  capital  employed  within 
the  state  at  the  same  rate  as  domestic  banks;  while  some  states 
like  Idaho  tax  foreign  banks  at  the  ordinary  rate  on  the  general 
average  of  moneys  used. 

Since  the  advent  of  trust  companies,  the  bank  tax  has  fre- 
quently been  extended  to  them,  as  in  New  York,  In  other  states 
as  in  many  of  the  New  England  commonwealths,  loan  and  trust 
companies  are  taxed  like  savings  banks,  rather  than  like  banks 
in  general.  In  other  cases  again,  as  in  California,  the  same 
methods  apply  to  banks,  savings  banks,  and  loan  and  trust  com- 
panies. Occasionally  also,  as  in  Idaho,  surety  and  fidelity  com- 
panies are  included  in  the  system  of  bank  taxation. 

There  remains  the  subject  of  savings  banks.  These,  when 
incorporated,  as  is  usually  the  case  in  the  western  states,  are 
taxable  in  the  same  way  as  banks  proper.  This  is  true  also  in 
Pennsylvania,  even  when  they  are  not  incorporated,  for  in  that 
state  they  pay  the  same  special  taxes  as  banks  in  general.  In 
New  York  they  are  taxable  only  on  surplus.  In  New  England, 
however,  the  custom  is,  and  has  for  a  long  time  been,  to  tax 
savings  banks,  which  are  almost  always  unincorporated,  on  their 
deposits.  In  Massachusetts,  where  up  to  that  time,  the  deposits 
had  been  nominally  taxable  as  the  personal  property  of  the  in- 
dividual depositors,  the  new  system  came  into  use  in  1862;  in 
Vermont,  not  until  1878;  in  the  rest  of  New  England,  in  the  in- 
terval. The  rate  of  tax  is,  however,  in  every  case  far  below  that 
on  property  in  general;  ^  and  it  is  customary  to  allow  various  de- 
ductions. Thus  in  Massachusetts  the  rate  is  one-half  of  one  per 
cent  on  deposits,  less  the  amount  invested  in  taxable  real  estate, 
mortgages  and  state  bonds.  In  New  Hampshire  the  rate  is 
three-quarters  of  one  per  cent  on  deposits,  deducting  the  amount 
invested  in  real  estate,  mortgages  bearing  not  more  than  five 
per  cent  interest,  and  state  and  local  bonds.  In  the  case  of 
special  deposits,  however,  the  rate  is  one  per  cent.  In  Vermont 
there  is  a  tax  of  seven-tenths  of  one  per  cent  on  the  deposits  and 

^  Cf.  in  general  W.  G.  Abbott,  Objections  to  the  Taxation  of  Savings  Banks. 
New  York,  1880.    . 


160 


ESSAYS  IX  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


161 


'I ' 


II 


accumulations  less  the  amount  invested  in  real  estate  or  in  federal 
bonds  (if  not  more  than  ten  per  cent  of  the  assets),  and  excluding 
also  individual  deposits  over  $2,()00,  provided  these  are  listed  to 
the  depositors  where  they  reside.^  In  Maine  a  tax  of  five-eighths 
of  one  per  cent  is  imposed  on  the  deposits,  reserve  fund  and  undi- 
vided profits,  with  deductions  for  the  assessed  value  of  real  estate, 
the  amount  invested  in  federal  bonds  or  in  shares  of  corporate 
stock  which  are  tax-free  to  stockholders  by  law,  and  deducting 
alsotwo-fif  ths  of  any  other  assets  which  are  invested  in  the  state. 
In  Connecticut  there  is  a  tax  of  one-quarter  of  one  per  cent  on 
deposits  exclusive  of  the  surplus  over  $50,000  and  over  the 
amount  invested  in  real  estate,  in  state  or  local  bonds  issued 
to  aid  railway  construction  or  in  the  stock  of  banks,  trust,  insur- 
ance, investment  and  bridge  companies.  In  Rhode  Island  the 
tax  is  at  the  rate  of  four-tenths  of  one  per  cent  on  deposits  and 
undivided  profits. 

Outside  of  New  England  the  tax  on  savings  banks  deposits 
is  found  only  in  Maryland  where  the  franchise  tax  on  savings 
banks  amounts  to  one-quarter  of  one  per  cent  on  the  deposits, 
three-fourths  of  the  tax  going  to  the  place  where  the  bank  is 
located,  and  one-fourth  going  to  the  state.  In  many  states 
outside  of  New  England,  however,  deposits  in  savings  banks 
are  nominally  taxable  to  the  owner  as  part  of  his  personal 
property.     In  New  York,  however,  such  deposits  are  exempt 

by  statute.  .     . 

In  the  matter  of  bank  taxation,  therefore,  we  are  beginnmg 
to  reach  uniformity,  with  the  exception  of  savings  banks 
in  the  New  England  states.  Two  points  are  especially  to  be 
emphasized  in  the  present  situation.  One  is  that  bank  taxa- 
tion has  been  comparatively  successful  in  proportion  as  we 
have  attempted  to  apply  to  the  property  tax  what  in  the  case 
of  the  income  tax  is  usually  called  the  stoppage-at-source  system. 
That  is,  not  the  income  receiver,  or  in  this  case  not  the  owner  of 
the  property,  is  taxed,  but  the  corporation  which  pays  out  the  in- 
come or  which,  in  this  case,  represents  the  owner  of  the  property 
and  deducts  the  tax  from  the  income  of  the  property.  The  second 
point  is  that  the  uniformity  which  has  been  attained  has  been  to  a 
large  extent  imposed  upon  the  states  by  national  law.  Were  it 
not  for  the  existence  of  the  national  banks  and  the  provision  of 
the  national  banking  law  of  1864  as  to  equal  taxation,  men- 

» Deposits  under  $2,000  arc  exempt  from  any  taxation. 


tioned  above,  the  system  of  taxation  of  banks  in  general  would 
probably  be  as  little  satisfactory  as  is  at  present  the  taxation 
of  other  intangible  property.  The  real  progress  that  has  been 
made  is  the  result  of  federal  pressure,  not  in  the  sense  of  de- 
ciding what  must  be  done,  as  in  Germany  or  Switzerland,  but 
in  the  sense  of  affirming  what  cannot  be  done.  The  mere  fact 
of  a  national  prohibition  has  sufficed  to  bring  order  into  the 
state  systems.  This  is  a  lesson  which  has  not  yet  been  learned 
in  most  of  the  other  corporation  taxes  with  which  we  shall 
have  to  deal. 

2.  Insurance  Companies 

The  next  corporations  to  break  away  from  the  general  prop- 
erty tax  were  the  insurance  companies.    At  first  only  foreign 
companies  ^  were  taxed.    The  earliest  law  was  that  of  1824  in 
New  York,  which  provided  that  foreign  fire  insurance  com- 
panies should  pay  ten  per  cent  on  all  premiums  for  property 
insured  within  the  state.     In  1829  the  law  was  extended  to 
foreign  marine  insurance  companies,  and  in  1837  the  rate  was 
reduced  to  two  per  cent.    Domestic  companies  were  taxable  on 
their  capital  stock,  like  all  other  corporations,  according  to  the 
general  law  of  1828.     Ohio  started  out  by  taxing  insurance 
companies  as  well  as  banks,  assessing  them  in  1830  four  per 
cent  on  their  dividends.    But  this  form  of  taxation  was  soon 
abandoned.    In  Pennsylvania,  where  domestic  companies  were 
included  in  the  general  law  of  1840,  foreign  insurance  com- 
panies were  not  specially  taxed  until  1849,  when  the  law  im- 
posed a  tax  of  one  per  cent  on  the  gross  premiums  of  foreign 
life  insurance  companies.    In  Maryland  the  custom  dates  from 
1839,  when  a  tax  of  two  per  cent  was  imposed  on  the  premiums 
received  by  the  agents  of  foreign  insurance  companies.     In 
Vermont  foreign  fire  insurance  companies  were  taxed  eight  per 
cent  on  their  premiums  in  1825;  but  the  law  was  repealed  five 
years  later.    In  Massachusetts  where  domestic  fire  and  marine 
insurance  companies  were  first  taxed  in  1862,  and  domestic  life 
insurance  companies  not  until  1880,  a  tax  on  foreign  companies 
was  first  levied  by  the  law  of  1832,  which  is  of  special  interest 

*  The  use  of  the  term  foreign  corporations  in  the  American  statutes  is 
confusing.  Generally  it  designates  companies  incorporated  in  another  of 
the  American  commonwealths.  In  only  a  few  cases  does  it  refer  to  non- 
American  states.  In  these  chapters  it  will  be  used  in  the  former  sense  unless 
otherwise  indicated. 


11 


162 


ESSAYS  IN   TAXATION 


as  the  prototype  of  what  is  known  in  several  of  our  common- 
wealths to-ciay  as  the  "reciprocal  acts."     The  act  provided 
that  if  any  commonwealth  taxed  the  agents  of  Massachusetts 
insurance  companies,  the  insurance  companies  of  such  com- 
monwealth were  to  pay  one-half  of  one  per  cent  on  the  whole 
amount  insured  by  such  companies  in  Massachusetts.    At  pres- 
ent the  reciprocal  acts  go  somewhat  further  and  prescribe  that 
foreign  insurance  companies  are  to  be  taxed  at  the  same  rate 
(if  higher  than  the  home  rate)  that  is  imposed  on  home  in- 
surance companies  by  the  commonwealth  chartering  the  foreign 
company.    Such  reciprocal  acts  are  found  in  over  two-thirds  of 
the  American  states;  and  in  a  few  states  like  Connecticut,  Ilh- 
nois  and  New  Jersey  they  still  constitute  the  only  form  of 
taxation  of  foreign  insurance  companies.     The  Kansas  court 
calls  them  "an  appeal  for  comity,"  "a  demand  for  equality; 
but  in  reality  they  are  retaliatory,  rather  than  reciprocity, 
laws,2  and  are  even  so  called  in  some  of  the  states. 

This  premiums  tax  on  foreign  companies  was  gradually  ex- 
tended to  domestic  companies,  until  at  present  it  is  found  in 
almost  every  commonwealth,  only  a  few  of  the  Western  states 
clinging  to  the  original  custom  of  taxing  them  on  their  property. 
Occasionally  the  tax  is  known  as  an  insurance  license  or  an  in- 
surance fee.     In  some  of  the  Southern  states  the  companies 
must  pay  both  fees  and  taxes.    In  most  cases  the  laws  apply 
to  all  kinds  of  insurance  companies,  of  which  the  chief  examples 
are  fire  and  life  insurance  companies.    In  several  states  casualty 
companies  are  included  and  in  a  few  states  others  as  well  are 
specifically  mentioned,  such  as  plate  glass,  indemnity,  accident, 
surety,  fidelity  and  employers'  liability  companies  in  Florida; 
plate  glass  and  boiler  insurance  companies  in  North  Carohna; 
river,  security  and  indemnity  companies  in  Louisiana;  live 
stock,  plate  glass,  lightning  and  tornado  companies  in  Missis- 
sippi; storm  and  lightning  companies  in  Texas;  and  marine 
companies  in  quite  a  number  of  states.    The  taxes  are  in  gen- 
eral the  same  on  the  various  classes,  although  not  infrequently 
somewhat  lower  rates  are  imposed  on  life  insurance,  and  es- 
pecially mutual  companies.    Yet  in  a  very  few  cases  the  reverse 
is  true.    Thus  in  Louisiana  the  graded  tax  rises  to  $4,500  in 
the  case  of  fire  insurance  companies,  but  to  $5,250  in  the  case  ot 

» C/.  29  Kan.  672.  ^.  ««  ai     oit 

2  Alabama  declared  them  unconstitutional  for  this  reason;  60  Ala.  zn> 
In  the  other  atatea  they  have  been  upheld. 


THE  TAXATION  OF  CORPORATIONS 


163 


life  insurance  companies;  and  in  Texas  life  insurance  companies 
may  be  taxed  up  to  3%  on  premiums,  other  companies  only  }/2 
of  1%.  These  are,  however,  exceptions  to  the  general  rule. 
Fire  and  life  insurance  companies,  again,  are  usually  taxed  not 
only  at  the  same  rate  but  in  the  same  maimer.  Yet  exceptions 
to  this  rule  are  occasionally  found.  In  Pennsylvania,  for  in- 
stance where  fire  and  marine  companies  pay  three  mills  per 
dollar  of  capital  stock,  fife  companies  (except  mutual)  pay  on 
gross  premiums.  In  New  Jersey  insurance  companies,  other 
than  life,  are  taxed  one  per  cent  on  premiums,  while  domestic 
life  insurance  companies  pay  one  per  cent  on  tlieir  surplus  plus 
thirty-five  hundredths  of  one  per  cent  on  their  premiums;  but 
the  payments  from  the  foreign  companies  are  credited  to  the 
domestic  companies.  New  Jersey,  however,  is  one  of  the  very 
few  states  where  the  (net)  assets  of  domestic  life  insurance 
companies  are  in  addition  subject  to  local  taxation. 

On  the  other  hand,  it  is  customary  to  make  a  distinction  be- 
tween domestic  and  foreign  companies.  In  nine  states  ^  domes- 
tic life  insurance  companies  are  not  taxed  at  all,  while  foreign 
companies  pay  on  gross  receipts  or,  as  in  Nevada,  are  subjected 
to  a  license  tax.  In  six  states,  domestic  life  insurance  companies 
are  taxed  at  a  lower  rate  than  foreign  companies — Alabama 
1%  as  against  2%,  Iowa  1%  as  against  23^%,  Mississippi  2}4% 
as  against  23^%,  Pennsylvania  8  per  mill  as  against  2%,  South 
Dakota  2%  as  against  23^%,  and  Tennessee  l}4%  as  against 
23^%.  Yet  in  a  few  cases  the  situation  is  the  reverse.  Thus 
in  Maine  foreign  life  insurance  companies  pay  13^%  on  gross 
receipts,  while  domestic  companies  pay  not  only  2%,  but  in 
addition  a  tax  on  surplus  after  deducting  the  value  of  the  real 
estate  owned  in  the  commonwealth.  So  in  Vermont  while  all 
insurance  companies  pay  2%  on  premiums,  domestic  life,  fire 
and  casualty  insurance  companies  pay  in  addition  1%  on  the 
surplus  above  the  necessary  reserve  of  4%,  although  with  a 
deduction  for  the  real  estate  locally  taxed.  In  Wisconsin  foreign 
life  companies  pay  a  license  fee  of  $300,  but  domestic  com- 
panies are  subject  to  a  tax  on  gross  receipts.  Here,  however, 
as  in  not  a  few  of  the  other  states  the  retaliatory  law  is 
in  force.  In  some  states,  again,  like  Rhode  Island,  mutual  in- 
surance companies  are  taxed  at  a  lower  rate  than  others.  New 
York  takes  perhaps  the  palm  in  the  matter  of  complexity  of  rate 

*  Indiana,    Kansas,    Kentucky,    Maryland,    Nevada,    North    Dakota. 
Oklahoma,  South  Carolina  and  West  Virginia. 


164 


ESSAYS  IN   TAXATION 


THE  TAXATION  OF  CORPORATIONS 


165 


III 


i^i;i 


I     t 


II' 


of  insurance  taxation.  Life  insurance  companies,  whether 
domestic  or  of  any  other  American  state,  pay  one  per  cent  on 
premiums,  while  Hfe  insurance,  health  and  casualty  companies 
of  foreign  countries  pay  under  the  insurance  law  two  per  cent. 
On  the  other  hand,  while  domestic  fire  and  marine  insurance 
companies  pay  one  per  cent  on  premiums,  similar  companies  of 
other  American  states  pay  two  per  cent,  and  similar  companies 
of  foreign  countries  pay  one-half  of  one  per  cent  to  the  state 
treasurer  and  in  addition  two  per  cent  to  the  local  fire  depart- 
ment or  superintendent  of  insurance  respectively.  In  addition 
all  foreign  companies  are  subject  to  the  retaliatory  tax. 

In  some  states,  again,  foreign  and  domestic  companies  are 
taxed  on  a  different  basis.  Thus  in  Delaware,  District  of  Colum- 
bia, Michigan,  Missouri,  Ohio  and  Oregon,  foreign  companies 
are  taxed  on  their  premium  receipts  while  domestic  companies 
are  taxed  on  either  -surplus  or  net  premiums.  Finally  in  Con- 
necticut, Illinois  and  New  Jersey  foreign  life  companies  are 
taxed  only  by  reciprocal  laws,  while  domestic  compames  are 
taxed  either  on  assets  or  on  surplus. 

Although  the  premiums  tax  is  the  general  tax  we  find  not  a 
few  cases  where  the  tax  is  based  on  a  different  element.    Some 
of  the  Southern  states  impose  license  or  privilege  taxes  of  a 
fixed  amount,  frequently  in  addition  to  the  tax  on  premiums. 
In  North  Carolina  insurance  companies  pay  licenses  from  ten 
to  two  hundred  and  fifty  dollars  together  with  a  tax  of  2^% 
on  gross  receipts;  in  Florida  from  fifty  to  two  hundred  dollars 
together  with  a  tax  of  2%  on  gross  receipts.     In  Mississippi 
they  pay  both  fixed  licenses  and  taxes  on  premiums,  but  the 
latter  tax  is  not  imposed  when  the  ad  valorem  tax  is  levied.    In 
Louisiana  life  and  accident  insurance  companies  pay  a  fixed 
license  tax  based  on  gross  premiums,  divided  into  69  classes,  the 
tax  being  graded  from  $150  to  $5,250.    In  Illinois,  Michigan, 
Missouri  and  Ohio,  the  tax  on  domestic  life  insurance  compan- 
ies is  imposed  on  surplus.    In  Connecticut  the  tax  is  imposed  on 
assets  at  the  rate  of  H  of  1%.    In  Wisconsin  the  tax  on  domes- 
tic life  companies  is  at  the  rate  of  3%  on  gross  income  excepting 
that  derived  from  the  rents  of  real  estate,  and  excepting  also 
premiums  collected  outside  of  the  state  on  poUcies  held  by  non- 

residents 

Other  states  combine  various  taxes.  Thus  Maine  levies  on 
domestic  life  insurance  companies  a  tax  of  2%  on  gross  receipts 
in  addition  to  a  tax  of  ^i  of  1%  on  surplus  after  deducting  the 


value  of  the  real  estate  owned  within  the  commonwealth.  Mas- 
sachusetts imposes  on  life  insurance  companies  a  tax  of  2}^ 
mills  on  each  dollar  of  insurance,  as  compensation  for  the  state 
valuation  of  policies  and  an  excise  tax  of  M  of  1%  on  the  net 
value  of  all  policies  in  force.  Other  domestic  insurance  com- 
panies, including  fire,  marine,  and  real  estate  title  companies, 
pay  an  excise  tax  of  one  per  cent  on  premiums  and  assessments; 
while  foreign  companies  pay  two  per  cent,  or  as  much  more  as 
is  necessary  according  to  the  retaliatory  law — which  law  ap- 
plies also  to  life  insurance  companies.  Non-American  com- 
panies pay  four  per  cent  on  premiums  (or  two  per  cent  if  there 
is  a  guarantee  fund  of  $200,000),  while  non- American  accident, 
fidelity  and  guarantee  companies  pay  two  per  cent.  It  need 
scarcely  be  added  that  when  the  reciprocal  law  is  in  force,  as  in 
New  York  and  Massachusetts,  there  is  a  highly  diversified 
system  of  insurance  taxation. 

The  tax  on  premiums  is  generally  levied  on  gross  premiums 
or  gross  receipts.  In  only  a  few  states,  as  in  Montana,  Nebraska, 
New  Mexico  and  Oklahoma  is  the  tax  levied  on  net  receipts. 
In  Illinois,  however,  the  net  receipts  of  foreign  insurance  com- 
panies are  entered  as  personal  property,  and  are  included  in 
the  general  property  tax;  whereupon  the  companies  are  then 
free  of  all  local  taxes,  except  for  the  benefit  of  the  fire  depart- 
ments which  may  impose  a  tax  not  exceeding  two  per  cent  on 
gross  receipts.  In  many  states  where  the  tax  is  imposed  on 
gross  premiums  certain  deductions  are  made.  Thus  in  the 
case  of  fire  companies  return  premiums  and  reinsurance  pre- 
miums are  deducted  in  eleven  states,^  and  losses  and  return  pre- 
miums in  a  few  others.  In  the  case  of  life  insurance  companies 
the  deductions  are  more  diversified.  In  Indiana  losses  are  de- 
ducted; in  Oklahoma,  South  Carolina,  Vermont  and  Washington 
dividends  are  deducted;  in  Idaho  losses  and  dividends;  in 
Arkansas  losses  and  commissions;  in  Maine  dividends  to  domes- 
tic policy  holders  only;  in  Mississippi  death  claims,  matured 
endowments  and  cash  dividends  paid  under  contracts  in  the 
state;  in  Iowa  losses,  matured  endowments,  dividends,  increase 
in  reserve  and  amounts  paid  in  cancelled  policies;  and  in  Utah 
the  property  tax  paid  on  any  real  or  personal  property.  More- 
over, it  has  been  decided  in  many  states  including  Kentucky, 
Louisiana,   Minnesota,   Nebraska,   New   York,    Pennsylvania 

1  Georgia,  Kentucky,  Maine,  Michigan,  New  Hampshire,  Ohio,  Penn- 
sylvania, Rhode  Island,  Vermont,  Virginia  and  Wisconsin. 


166 


ESSAYS  IN  TAXATION 


and  Tennessee,  either  by  the  courts  or  by  the  administrative 
authorities,  that  the  words  ''gross  premiums"  or  "premiums 
received"  do  not  mean  the  premiums  stipulated  for,  but  that 
the  so-called  rebates  or  dividends  paid  to  policy  holders  should 
be  deducted,  as  they  diminish  to  that  extent  the  premiums  ac- 
tually received  by  the  companies.^ 

The  rates  of  taxation  are  now  exceedingly  varied,  being  from 
}4  of  1%  to  3%  in  the  case  of  Ufe  insurance  companies,  and 
from  3^  of  1%  to  33^2%  in  the  case  of  fire  insurance  and  other 
companies.  In  the  case  of  life  insurance  companies  the  rates 
have  tended  to  increase  during  the  past  few  decades.  Toward 
the  middle  of  the  eighties  of  the  last  century  the  average  rate 
in  all  the  states  was  a  little  over  one  per  cent  on  gross  premiums. 
By  1892  the  average  had  risen  to  one  and  a  half  per  cent.  By 
the  end  of  the  century  it  was  over  two  per  cent,  and  at  present 
it  is  still  higher— about  2.08  per  cent.^  It  must  be  remem- 
bered further  that  insurance  companies  are  in  almost  all  cases 
also  taxable  locally  for  their  real  estate,  and  that  six  states, 
chiefly  in  the  south,  permit  the  counties  or  municipahties  or 
both  to  levy  additional  taxes  on  premiums;^  while  not  a  few 
of  the  Southern  states  like  Florida  levy  in  addition  fixed  Ucenses, 
state  or  local  or  both. 

The  growing  burdens  on  life  insurance  have  led  in  recent 
years  to  a  discussion  as  to  their  propriety.  In  view  of  this  and 
of  the  further  fact  that  life  insurance  companies  differ  in  im- 
portant respects  from  the  other  corporations  treated  in  these 
chapters  we  shall  depart  from  the  general  order  of  treatment 
and  discuss  briefly  in  this  place  the  principle  involved. 

On  the  one  hand  it  is  claimed  that  life  insurance  companies, 
or  at  least  mutual  life  insurance  companies,  should  not  be 
taxed  at  all.  For  such  companies  it  is  said,  are  not  profit- 
making  organizations.  A  tax  on  them  is  really  a  tax  on  the  pol- 
icy holders,  and  thus  in  effect  a  tax  on  thrift  and  foresight, 
constituting  an  interference  with  a  socially  most  commendable 

1  A  full  account  of  the  law  and  practice  on  this  point  will  be  found  in  the 
Memorandum  on  Interpretation  of  Sees.  65  and  73  of  Chap.  77,  Acts  of  1907 
of  the  State  of  West  Vinginia  relating  to  the  Tax  on  the  Premiums  of  Life 
Insurance  Companies.  By  Alfred  Hurrell,  Attorney  of  the  Association  of 
Life  Insurance  Presidents.    [1910.]  ,     r?  •  j 

2  Cf.  J.  F.  Dryden,  Taxation  of  Life  Insurance  Companies  in  the  United 
States.    An  Address,  New  York,  1908,  pp.  11-12 

3  These  are  Alabama,  Georgia,  Kentucky,  Montana,  South  Carolina 
and  Virginia. 


THE  TAXATION  OF  CORPORATIONS  167 

and  beneficent  practice.  ^  Other  writers  do  not  go  quite  so  far 
as  this,  but  make  a  plea  for  great  leniency  of  treatment  and 
suggest  that  a  tax  be  imposed  in  the  nature  of  a  license  fee  for 
the  privilege  of  doing  business,  the  amount  of  the  tax  to  be 
restricted  to  a  sum  just  sufficient  to  cover  the  necessary  cost  of 
supervision.  For  life  insurance  companies,  according  to  these 
authors,  enjoy  no  special  privilege,  but  constitute  primarily  a 
means  of  co-operation  to  distribute  the  cost  of  providing  for 
dependent  widows  and  children  and  of  saving  a  fund  for  old 
age.2 

To  this  view,  however,  several  objections  may  be  urged. 
In  the  first  place,  modern  life  insurance  companies  are  often 
utihzed,  in  part  at  least,  to  afford  a  safe  means  of  investment 
as  well  as  insurance  against  death.  Why,  it  may  be  asked, 
should  such  investments  be  treated  more  tenderly  than  others! 
But,  secondly,  there  is  a  broader  ground  for  dissent  from  the 
claim  for  great  leniency.  The  demand  that  the  amount  of  the 
tax  should  be  put  in  some  relation  to  the  cost  of  supervision  is 
untenable  because  the  modern  basis  of  taxation,  as  we  know, 
IS  not  benefits  received  or  the  cost  of  the  advantage  conferred,' 
but  ability  to  pay.  While  it  is  indeed  true  that  public-service 
corporations  which  enjoy  special  privileges  may  reasonably  be 
asked  to  pay  a  special  tax  because  these  privileges  enhance 

»  The  fullest  statement  of  this  position  will  be  found  in  Willard  Morrill 
Taxation  of  Life  Insurance  Companies.  Argument  before  the  Wisconsin  Tax 
Commission  at  Madison,  Oct.  2,  1900,  esp.  pp.  3-11,  41.  See  also  a  mono- 
graph bearmg  the  same  title  by  Charles  E.  Dyer,  giving  the  argument  sub- 
mitted on  Oct.  23d,  1900.  For  a  more  recent  statement  see  Robert  Lynn 
Cox,  The  Impropriety  of  taxing  Returns  to  Life  Insurance  Policy  Holders 
Boston,  1909,  pp.  5-6.  Cf.  the  addresses  at  the  Tax  Conference  held  in 
New  York  in  Dec,  1908,  under  the  auspices  of  the  Association  of  Life  In- 
surance Presidents;  and  the  Proceedings  of  the  Annual  Meetings  of  the 
Association  [six  to  1912]. 

2  This  view  is  emphasized  in  the  "Report  of  the  Committee  on  Uniform 
Insurance  Taxation"  in  the  Addresses  and  Proceedings  of  the  Fourth  Confer- 
ence of  the  International  Tax  Association,  Columbus,  1911,  pp.  291-294 
A  plea  for  leniency  is  also  made  by  S.  S.  Huebner,  "The  Taxation  of  Life 
and  Fire  Insurance  Companies"  in  ibid.,  First  Conference,  New  York,  1908, 
p.  595.  Cf.  also  Injustice  and  Inequality  of  Life  Insurance  Taxation.  Re- 
port of  Committee  adopted  by  National  Convention  of  Insurance  Commis- 
sioners at  Detroit  on  August  2^,  1908;  E.  E.  Rittenhouse,  Taxation  of 
Insurance  Premiums,  An  Address,  Atlantic  City,  190^;  J.  A.  De  Boer,  Tax- 
ation of  Level^  Premium  Life  Insurance,  1909;  and  the  chapters  devoted  to 
taxation  in  F.  L.  Hoflfmann,  Insurance  Science  and  Economics,  New  York 


Irtff  *^«pg")f  ^!pH»i!li'Hmrttanhmw  H'  "*^ih*";:^S* 


h 


168 


ESSAYS  IN   TAXATION 


their  ability  to  contribute  to  the  common  burdens,  the  absence 
of  special  privilege  does  not  justify  exemption  or  remission  from 
ordinary  taxation,  whether  in  the  ca^e  of  corporations  or  in 
that  of  individuals.    Moreover,  the  mere  fact  that  the  property 
or  the  income  on  which  the  tax  is  imposed  is  the  result  of  thrift 
or  foresight  cannot  be  regarded  as  constituting  a  valid  objec- 
tion    As  long  as  the  general  test  of  abiUty  to  pay  is  found  m 
property,  as  in  the  United  States,  or  in  income,  as  m  Europe 
it  is  impracticable  to  avoid  the  taxation  of  thrift  or  of  any  of 
the  other  quaUties  which  are  responsible  for  the  accumulation 
of  capital  or  the  enjoyment  of  income.    For  all  capital  is  the 
result  of  saving.     To  abandon  the  taxation  of  life  insurance 
savings  would  logically  lead  to  the  abandonment  of  all  taxes  on 
savings  in  general,  and  that  would  be  tantamount  to  the  taxa- 
tion of  expenditure  which,  as  we  know,^  represents  a  bygone 
stage  in  the  evolution  of  fiscal  policy.    As  it  has  been  well  put: 

"This  system  of  taxing  savings  and  accunmlated  wealth  has  been 
deliberately  adopted  and  will  not  be  abandoned.  The  civilized  nations 
of  the  world  have  committed  themselves  to  the  general  policy  of  leyy- 
incr  taxes,  so  far  as  possible,  in  proportion  to  ability,  not  disability; 
according  to  strength,  not  weakness;  and  as  the  thrifty  man  is  usually 
the  able  and  the  strong  man,  he  ^vill  continue  to  pay  most  of  the  taxes 
One  of  the  incidental  disadvantages  of  this  abihty  principle  is  the  fact 
that  it  does  to  a  degree  tend  to  discourage  thrift.  But  you  cannot  build 
a  system  on  incidentals.  The  proposal  to  build  a  system  of  taxation 
on  sumptuarv  principles-i)enalizing  waste  and  thrift lessness,  reward- 
ing thrift  and  industry-has  been  repeatedly  made  m  the  past  and 
deliberately  rejected.  It  is  impracticable,  for  one  thmg,  because  the 
more  it  succeeds,  the  less  revenue  it  yields."  ^ 

On  the  other  hand,  it  is  equally  true  that  life  insurance^  com- 
panies should  not  be  subjected  to  an  exceptionally  high  rate 
of  taxation.  Owing  to  the  ease  with  which  they  can  V)e  reached, 
it  has  become  customary  in  the  United  States  to  put  them 
almost  on  a  plane  with  public-service  corporations,  and  vir- 
tually to  tax  the  capital  invested  in  insurance  policies  at  a 

2T^"s"Aaims,*  Some  Ohsfaclcs  which  delay  the  Reform  of  Life  hisurance 
Taxation.  A  n  Addrens  delmred  at  the  Fourth  Annual  Meeting  of  the  Associa- 
tion  of  Life  Insurance  Presidents,  Chicago,  1910,  pp.  &-7  of  reprint.  (/. 
also  Lester  F.  Zartman,  Inreslmcnts  of  Life  Insurance  Cornpanws,  New 
York  1906,  and  the  same  author's  Necessity  for  Reform  in  Life  Insurance 
Taxation  An  Address  delivered  at  the  second  Annual  Meeting  of  the  Associa- 
tion of  Life  Insurance  Presidents,  New  York  1908,  pp.  3-5  of  reprmt. 


THE  TAXATION  OF  CORPORATIONS 


169 


considerably  higher  rate  than  other  intangible  property,  most 
of  which  in  fact  practically  escapes  taxation.  Not  only  are 
life  insurance  investments  taxed  more  severely  than  others, 
but  life  insurance  companies  in  the  United  States  are  taxed  at 
a  higher  rate  than  anywhere  else  in  the  civilized  world. ^ 

Moreover,  the  life  insurance  companies  have  undoubtedly 
a  just  ground  of  complaint  in  the  heterogeneity  of  burdens 
to  which  they  are  subjected.^  The  evils  of  unequal  and  double 
taxation,  which  as  we  have  seen  above  ^  are  great  enough  in 
general  in  the  United  States,  are  accentuated  in  this  case  by 
the  remarkable  decision  of  the  Supreme  Court  that  the  busi- 
ness of  life  insurance  does  not  constitute  commerce  and  is 
therefore  not  subject  to  the  restrictions  governing  the  state 
taxation  of  inter-state  commerce. 

When  we  come  to  the  question  as  to  the  basis  on  which  life 
insurance  companies  should  be  taxed,  it  is  not  altogether  easy 
to  reach  a  decision.  Some  authorities  recommend  the  taxation 
of  assets  or  of  the  income  from  assets.^  This  is,  however,  im- 
practicable in  most  of  the  commonwealths  because  a  large 
part  of  the  insurance  is  written  by  foreign  companies  whose 
assets  it  is  impossible  to  reach.  It  is  largely  for  this  reason 
that  most  of  the  states  have  had  recourse  to  the  taxation  of 
gross  premium  receipts  within  the  state.  In  principle,  how- 
ever, this  is  open  to  serious  objection,  for  very  much  the 
same  reason  that  taxes  on  gross  receipts  in  general  are  lacking 
in  equity.^ 

In  addition  to  this  general  objection  it  may  be  observed 
that  a  system  of  taxation  of  premium  receipts  is  not  especially 
well  suited,  in  theory  at  least,  to  a  community  which  still  con- 
tinues to  tax  property  as  such.  For  premium  receipts  bear 
comparatively  little  relation  to  assets.     Companies  carrying 

*  In  GeiTnany,  for  instance,  with  an  annual  premium  income  of  over 
120  million  dollars,  life  insurance  companies  paid  in  taxes  of  all  kinds  in 
1907  only  about  .$300,000,  or  less  than  one-quarter  of  one  per  cent  of  the 
premium  income  as  over  against  the  two  per  cent  and  more,  which  is  the 
average  in  America.  Cf.  J.  F.  Dryden,  Taxation  of  Life  Insurance  Com- 
panies in  the  United  States,  1908,  p.  10. 

2  Cf.  W.  J.  Graham,  Life  Insurance  Taxation.  An  Address  before  the  North 
Dakota  Tax  Association.     Grand  Forks  [1910]. 

*  Supra,  chap.  iv. 

*  This  is  the  view  of  the  Wisconsin  Tax  Commission  in  its  Report  for 
1911,  and  is  also  upheld  by  G.  H.  Noyes,  Life  Insurance  Taxation.  Report 
and  Bill  of  the  Wisconsin  Tax  Commission,  with  other  Facts  (1911). 

^  Infra,  chap,  vii,  sec.  ii. 


170 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


171 


)i 


large  amounts  of  so-called  industrial  insurance  collect  much 
larger  amounts  in  premiums  in  proportion  to  reserve  asseU 
required  to  meet  the  obligation  of  those  contracts  than  m  the 
case  of  the  usual  type  of  policy.  The  same  disproportion  is 
to  be  found  in  companies  which  have  a  large  amount  of  paid-up 
and  well-matured  policies  m  force  as  compared  with  other 

companies.^  ,  •.    i      1 1 

If  premium  receipts  at  all  are  nevertheless  utilized,  it  should 
be  as  far  as  possible  net,  rather  than  gross,   premiums  on 
which   the  tax  is  imposed.      That  is  to  say,  the  companies 
should  be  permitted  to  deduct  from  the  gross  premium  receipts 
all  moneys  paid  back  during  the  year  by  way  of  death  losses 
surrender  valuej,  endowments,  etc.,  as  well  as  for  expenses  of 
the  local  agency  organizations.^     In  this  way  we  should  at 
least  get  a  little  closer  to  the  relative  taxable  ability  ot  the 
various  companies.     It  is,  however,  not  Ukely  that  any  im- 
mediate change  will  be  made  in  the  policy  of  the  American 
commonwealths,   which   are  predisposed  to  the  simpler  ad- 
ministrative methods  and  which  naturally  prefer  ease  and 
certainty  of  assessment  to  the  more  ideal  ends  of  abstract 
justice.    As  long  as  this  feeling  prevails,  perhaps  the  most  prac- 
ticable plan  still  remains  that  of  a  fairly  low,  but  uniform  tax 
on  gross  receipts.    But  this,  it  must  not  be  forgotten,  is  only  a 
relatively  satisfactory  solution. 

3.  Railroads 

(a)  History 

A  complete  history  of  the  development  of  railway  taxation 
would  occupy  an  entire  book.  It  will  be  possible  here  to  say 
only  a  few  words  about  some  of  the  typical  commonwealths. 

1  Cf.  George  Curtis.  Jr.,  Life  Insurance  Taxation,  An  Address,  1911.  This 
is  incorporated  with  a  few  changes,  in  the  Report  of  the  Wisconsin  Tax 

Commission  for  1910,  chap.  5.  ,     _  .        ^         ^       m       ,  •       f  t  r. 

2  This  suggestion  is  forcibly  urged  by  Robert  Lynn  Cox,  Taxation  of  Life 
Insurance  in  the  United  States,  A  Repnnt  from  the  Addresses  and  Proceedings 
of  the  Second  International  Conference  on  State  and  Local  Taxation.  Colum- 
bus, 1908,  pp.  14-15.  ,       •     .V     TT  •*    1  a*„+^c 

'There  is  no  general  history  of  railway  taxation  in  the  United  States. 
For  the  period  from  1890  to  1902,  however,  we  now  have  the  admirable 
compilation  by  the  Interstate  Commerce  Commission  entitled  Railways  in 
the  United  States  in  t902.  A  Twenty-two  Year  Review  of  Railway  Operations; 
a  Forty-Year  Review  of  Changes  in  Freight  Tariffs;  a  Fifteen-Year  Remew  of 


In  Pennsylvania,  railroads  were  included  in  the  general  tax 
law  of  1840,  and  were  assessed  on  their  personalty  and  on  their 
dividends.  In  1844  the  tax  on  personalty  was  abandoned,  but 
the  general  corporation  tax  on  capital  and  dividends  continued 
with  some  modifications.  In  1861  a  special  tonnage  tax  was 
levied  on  transportation  companies  at  the  rate  of  two,  three 
and  five  cents  per  ton  of  freight  carried,  and  an  additional  tax  of 
three-quarters  of  one  per  cent  was  laid  on  their  gross  receipts. 
The  former  was  declared  unconstitutional  by  the  federal  courts, 
and  as  a  result,  by  the  act  of  1874,  both  the  tonnage  tax  and  the 
gross  receipts  tax  were  abandoned.  For  the  old  tonnage  tax 
there  was  now  substituted  a  tax  of  three  cents  a  ton  on  the 
number  of  tons  of  coal  mined  or  purchased  by  the  companies 
engaged  in  mining,  purchasing  or  selling  coal.  This  tax,  however, 
ceased  in  1881,  after  having  been  declared  unconstitutional, 
because  it  applied  to  interstate  tonnage,  notwithstanding  the 
fact  that  it  was  a  tax  on  franchise,  and  not  on  business.  In 
1877  the  gross  earnings  tax  was  reimposed  at  the  rate  of  eight- 
tenths  of  one  per  cent  and  with  slight  amendments  in  1879  and 
1889  is  still  in  force.  In  1879  a  law  was  passed  imposing  a  tax 
on  the  capital  stock  of  corporations  in  general,  which  with  some 
amendments  is  in  force  to-day.^  In  the  meantime  railroads  were 
subjected  to  the  tax  on  loans  which  was  first  imposed  in  1864. 
In  1868  an  attempt  was  made  to  extend  this  tax  to  securities 
held  by  non-residents,  but  the  act  was  declared  unconstitutional, 
as  was  a  later  act  of  a  similar  nature  in  1881.  It  was  not  until 
1885  that  an  effective  tax  on  corporate  loans,  now  in  force,  was 
introduced. 

In  New  York,  railroads  were  subject  to  the  general  property 
tax  until  1880,  when  a  law  was  enacted  substituting  for  state 
purposes  a  tax  on  the  capital  stock  of  corporations  in  general, 
which  will  be  discussed  later  in  detaiP  and  which  with  some 
modifications  is  still  in  force.  In  1881  an  additional  annual 
*' franchise  tax"  was  imposed  at  the  rate  of  one-half  of  one  per 
cent  on  the  gross  earnings  of  all  transportation  and  transmission 
companies.  In  1886  the  organization  tax  was  imposed  on  all 
Federal  Railway  Regulation;  a  Twelve-Year  Review  of  State  Railway  Regula- 
tion; and  a  Twelve-Year  Review  of  State  Railway  Taxation,  Washington, 
1903.  Cf.  W.  O.  Hedrick,  History  of  Railroad  Taxation  in  Michigan, 
Lansing,  1912;  and  G.  E.  Snider,  The  Taxation  of  Gross  Receipts  in  Wiscon- 
sin, American  Economic  Association,  1906. 

1  Cf.  infra,  p.  197. 

^  Infra,  pp.  200  et  seq. 


i\ 


i 

fj 


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ESSAYS  IN   TAXATION 


\ 


corporations  in  general  and  in  1895  the  license  tax  on  foreign 
corporations.  Finally  in  1899  the  special  franchise  tax,  to  be 
explained  later,  was  introduced.  All  these  laws  are,  with  some 
modifications  still  in  force. 

In  Connecticut,  the  law  requiring  certain  stock  companies 
to  make  returns  of  the  stock  owned  by  individuals  was  extended 
in  1846  to  railroads.    Three  years  later  every  railroad  that  had 
paid  a  dividend  in  the  preceding  year  was  required  to  pay  one- 
half  of  one  per  cent  on  the  market  value  of  the  shares  held  by 
non-residents;  but  if  the  railroad  was  partly  out  of  the  state,  the 
tax  was  to  be  proportioned  to  the  mileage  in  the  state.    This 
system  worked  so  well  that  in  1850  it  was  extended  to  resident 
stockholders,  and  was  made  one-third  of  one  per  cent  in  Ueu 
of  all  other  taxes.     In  1862  the  rate  was  increased,  but  the 
provision  was  inserted  that  the  stock  should  not  be  assessed 
at  less  than  ten  per  cent  of  the  par  value.    In  1864  the  outhnes 
of  the  present  system  were  drawn  by  requiring  the  companies 
to  add  to  the  valuation  of  the  stock  the  market  value  of  the 
funded  and  floating  indebtedness  less  the  cash  on  hand,  and 
to  pay  one  per  cent  on  this  valuation  in  proportion  to  the  mile- 
age in  the  state.    In  1871  it  was  provided  that  if  the  railroad 
paid  any  local  tax  this  might  be  deducted  from  the  state  tax. 
In  1881  a  deduction  was  made  from  the  taxable  valuation  for 
such  portion  of  its  debt  as  was  contracted  for  stock  taken  in 
other  roads.    In  1882  the  funded  and  floating  debts  and  bonds 
were  to  be  valued  at  par  unless  the  market  value  was  below  par. 
In  1915,  however,  the  system  was  changed  to  the  taxation  of 
gross  earnings  and  the  present  law  was  enacted. 

In  Vermont  the  attempt  to  break  away  from  the  older  meth- 
ods came  in  1882,  when  a  graded  gross  receipts  tax  was  imposed. 
On  gross  receipts  up  to  $2,000  a  mile  the  rate  was  2%;  on  the 
first  $1,000,  or  part  thereof,  above  $2,000  the  rate  was  3%;  on 
the  first  $1,000,  or  part  thereof,  above  $3,000  the  rate  was  4%; 
and  above  $4,000  the  rate  was  5%.  This  law,  however,  was 
declared  unconstitutional  in  1890  by  the  state  court  as  an  in- 
terference with  interstate  commerce  and  was  supplanted  by 
the  law  of  the  same  year,  which,  with  a  few  modifications,  is 
still  in  force  and  which  provided  for  an  alternative  system — 
either  a  tax  on  gross  receipts  or  a  tax  on  the  so-called  appraisal, 
which  is  nothing  but  an  ad  valorem  tax,  including  the  value  of 
the  franchi^  0,  although  at  a  fixed  rate.  The  tax  on  appraisal 
was  fixed  at  Vio  of  1%  in  1890,  was  increased  to  1%  in  1902, 


THE  TAXATION  OF  CORPORATIONS 


173 


and  to  1}4%  in  1908.  The  gross  receipts  tax  was  fixed  at  2}^% 
in  1890  and  in  1906  a  graded  tax  of  from  214  to  4%  was  intro- 
duced.    In  1912,  however,  the  gross  earning  tax  was  abolished. 

In  Maine,  a  graded  gross  earnings  tax  was  imposed  in  1881. 
The  rates  were  J^of  1%  on  gross  earnings  up  to  $2,250  a  mile; 
}i  of  1%  on  earnings  from  $2,250  to  $3,000;  and  then  increasing 
by  H  of  1%  for  every  $750  until  the  rate  reached  S}4%-  In 
1893  the  rates  were  altered  by  providing  that  on  earnings  of 
$1,500,  or  under,  the  rate  should  be  3^  of  1%,  thence  increasing 
by  3^  of  1%  for  every  $750  until  the  rate  reached  S}4%.  In 
1907  the  maximum  reached  4}^%  and  in  1911  the  rates  were 
further  increased  and  the  scale  now  in  force  was  instituted. 

In  Maryland  the  gross  receipts  tax  was  first  imposed  in  1888 
at  the  rate  of  }/^  of  1%.  In  1890,  the  rate  was  increased  to  1%, 
and  the  tax  was  made  applicable  to  foreign  as  well  as  domestic 
railways.  In  1896  the  tax  was  graduated,  being  7io  of  1%  on  the 
first  $1,000  per  mile  of  gross  earnings;  l}4,%  on  earnings  from 
$1,000  to  $2,000  per  mile;  and  2%  on  all  earnings  over  $2,000  per 
mile.  In  1906  the  rates  were  increased  and  the  scale  now  in 
force  was  adopted. 

Of  the  other  Eastern  states  to  break  away  from  the  primitive 
system  New  Jersey  has  had  an  especially  interesting  history 
partly  because  it  still  favors  a  variation  of  the  ad  valorem  system, 
partly  because  its  peculiar  situation  has  enabled  it  to  grapple 
more  successfully  with  the  problem  of  the  adjustment  of  state 
and  local  taxation.  For  New  Jersey  is  economically  only  an 
adjunct  to  the  city  of  New  York.  A  small  state,  with  a  popula- 
tion far  inferior  to  that  of  the  neighboring  metropolis  across  the 
river,  and  with  correspondingly  insignificant  state  expenses, 
New  Jersey  is  traversed  by  some  of  the  most  important  railway 
lines  in  the  country  and  contains  what  are  practically  the  New 
York  city  terminals.  From  an  early  period,  therefore,  the  rail- 
way tax  question  assumed  an  importance  which  was  not  realized 
until  much  later  in  other  states.  In  New  Jersey  railroads  were  at 
first  subject  to  special  taxes  as  fixed  in  their  separate  charters. 
In  1851,  however,  they  were  subjected  to  the  general  property 
tax  system.  In  1873  came  the  break.  A  tax  was  now  imposed 
at  the  rate  of  one-half  of  one  per  cent  on  a  valuation  equal  to 
their  cost,  equipment  and  appendages,  and  the  assessment  was 
put  into  the  hands  of  a  state  official  known  as  the  state  com- 
missioner of  railroad  taxation.  Three  years  later,  as  the  result 
of  a  constitutional  amendment  of  1875  the  cost  tax  was  aban- 


I 


174 


ESSAYS  IN   TAXATION 


THE  TAXATION  OF  CORPORATIONS 


175 


doned  and  a  tax  at  the  same  rate  was  imposed  on  the  "true 
value"  of  the  road  and  equipment,  which  was  now  to  be  esti- 
mated by  a  board  of  railway  commissioners.    In  1884  a  new  and 
more  elaborate  system  was  adopted.    A  state  board  of  assessors 
was  created  to  value  all  railway  property  used  for  railway  pur- 
poses, the  non-operative  real  estate  being  still  assessed  locally 
like  other  ordinary  realty.    The  property  was  divided  into  four 
parts,  viz.:  (1)  the  so-called  main  stem,  consisting  of  the  road- 
bed, not  exceeding  one  hundred  feet  in  width,  and  the  railroad 
stations;  (2)  the  rest  of  the  real  estate  used  for  operation,  ordi- 
narily described  as  the  second-class  property;  (3)  the  tangible 
personalty  of   the   railway;   and   (4)   the   franchise.    It  was 
this  last  category  which,  as  we  shall  see  later,  was  the  impor- 
tant innovation,  and  which  constituted  the  real  departure  from 
the  system  of  property  taxation.    On  the  entire  valuation,  as 
fixed  by  the  board,  a  tax  of  one-half  of  one  per  cent  was  imposed 
for  state  purposes.    In  addition  to  this  tax,  the  so-called  second- 
class  property  was  to  be  taxed  at  the  general  local  rate  (not  to 
exceed  one  per  cent),  and  the  revenue  from  this  additional  tax 
was  to  go  to  the  localities.    This  remained  the  system  until  1897 
when  the  state  relinquished  to  the  localities  the  entire  tax  on 
second-class  property,  reserving  to  itself  only  the  tax  on  the 
main    stem,   the    personal    property   and    the    franchise.    In 
1906,  however,  the  tax  rate  on  these  three  categories  was  con- 
siderably increased,  railroad  stations  which  had  hitherto  been 
included  in  the  main  stem  were  now  placed  in  the  second  class 
property  subject  to  local  taxation,  and  the  present  system  was 
put  into  force. 

Leaving  the  states  of  the  Atlantic  seaboard  we  come  next  to 
Ohio.  Ohio  retained  the  old  system  as  the  exclusive  method 
until  1896.  In  that  year,  howc  ver,  Ohio  added  a  so-called  excise 
tax  of  }^  of  1%  on  gross  receipts  for  state  purposes,  which  Wiis 
increased  in  1902  to  1%.  The  ad  valorem  system,  however,  was 
also  continued.  The  same  double  system  has  been  perpetuated 
by  the  law  of  1910,  still  in  force,  which  increased  the  tax  on 
gross  earnings  (now  limited  strictly  to  intra-state  earnings)  and 
which  at  the  same  time  confided  the  assessment  of  railway  prop- 
erty to  a  state  board. 

Of  the  states  further  west  the  break  with  the  old  methods 
had  come  earlier.  In  Michigan  a  tax  on  gross  receipts  was 
first  imposed  in  1873  at  the  rate  of  4%  or  2%,  according  as  re- 
ceipts were  over  $4,000  or  not,  although  a  few  of  the  most  im- 


portant railroads  in  the  state  were  subject  to  special  taxation 
as  fixed  in  the  original  charter  provisions.  In  1891  the  general 
tax  on  gross  receipts  was  graded  according  to  the  following  scale: 
for  the  first  $2,000  gross  receipts  per  mile  the  rate  was  2%; 
from  $2,000  to  $4,000,  2i^^%;  from  $4,000  to  $6,000,  3%;  from 
$6,000  to  $8,000  33^^%;  over  $8,000,  4%.  In  1897  the  scale 
was  increased,  the  stages  remaining  the  same,  but  the  rates 
being  respectively  2^%,  3M%,  4%  and  5%,  with  the  further 
addition  that  the  gross  income  of  all  union  railroad  station  and 
depot  companies  whose  earnings  were  over  $20,000  a  mile  should 
pay  10%  on  the  excess  gross  incomes  over  that  amount.  In 
1899,  however,  for  reasons  to  be  discussed  later,  the  gross  re- 
ceipts tax  was  abolished  and  the  ad  valorem  system  reintro- 
duced. This  law  was  declared  unconstitutional,  w^hereupon 
the  constitution  was  amended  in  1900;  and  in  1901  the  ad  va- 
lorem system  was  reinstituted  by  a  law  still  in  force,  the  valua- 
tion to  be  entrusted  to  a  state  tax  commission. 

What  happened  in  Michigan  took  place  also  in  Wisconsin. 
Wisconsin's  experiment  with  the  taxation  of  gross  receipts 
began  considerably  earlier — namely,  as  far  back  as  1854,  when 
a  tax  at  the  rate  of  1%  was  imposed.  After  some  trouble  with 
this,  the  tax  was  changed  to  a  license  fee  on  gross  earnings, 
at  the  same  rate,  and  in  1862  the  rate  was  increased  to  3%. 
In  1871  a  special  rate  of  5%  was  imposed  on  railways  in- 
debted to  municipalities,  etc.  In  1874,  the  general  rate  was 
increased  to  4%,  and  in  1876  a  graduated  scale  was  intro- 
duced. The  so-called  license  fees  were  now  fixed  as  follows: 
for  receipts  of  less  than  $1,500  per  mile  the  tax  was  $5  per 
mile;  from  $1,500  to  $3,000,  $5  per  mile  plus  2%  on  earnings  in 
excess  of  $1,500;  f(5r  receipts  of  $3,000  and  over,  4%.  But  all 
railroads  upon  pile  or  pontoon  bridges  were  taxed  uniformly  at 
the  rate  of  2%.  In  1897  the  scale  was  revised  as  follows:  for  re- 
ceipts of  less  than  $1,500  per  mile,  the  tax  remained  at  $5  per 
mile;  from  $1,500  to  $2,000,  the  tax  was  $5  per  mile  plus  23^%  on 
the  excess  earnings  over  $1,500;  from  $2,000  to  $2,500,  the  rate 
was  3%;  from  $2,500  to  $3,000,  3^%;  above  $3,000,  4%.  The 
same  provision  as  before  governed  pile  and  pontoon  railroads. 
In  1903,  however,  largely  for  the  same  reasons  as  in  Michigan, 
the  gross  receipts  system  was  abandoned  and  was  replaced 
by  the  ad  valorem  method,  under  strict  state  assessment. 

While  Michigan  and  Wisconsin  have  abandoned  the  gross 
receipts  method,  Minnesota  has  retained  it  and  California, 


I 


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176 


ESSAYS  IN  TAXATION 


after  a  careful  study  of  the  problem  has  recently  introduced  it. 
In  Minnesota  the  system  until  1873  wsls  that  of  the  old  general 
property  tax.  In  that  year  it  was  provided  that  railways  might 
commute  for  the  property  tax  l)y  the  payment  of  a  tax  on  gross 
earnings.  In  1887  the  gross  earnings  tax  was  made  obligatory: 
for  the  first  three  yeai-s  of  operation,  the  rate  was  1%,  for  the 
next  seven  years,  2%,  thereafter,  3%.  In  1903,  however,  a  flat 
rate  of  4%  was  introduced,  increased  in  1913  to  5%.  When 
California  adopted  a  similar  system  in  1910,  the  same  rate  of 
4%  was  applied,  increased  in  1915  to  534%  and  in  1921  to  7%. 
The  only  other  Western  state  to  employ  the  gross  receipts 
method  was  North  Dakota,  which  introduced  the  system  in 
1883,  the  rates  being  graded  according  to  the  age  of  the  road. 
In  1889,  however,  the  roads  were  given  the  alternative  of  paying 
a  tax  on  property  or  on  gross  earnings.  But  in  1891  the  gross 
earnings  law  was  declared  unconstitutional,  and  since  then 
North  Dakota  taxes  railroads  according  to  the  ad  valorem  sys- 
tem supplemented  since  1919  by  a  3%  income  tax. 

There  remain  the  Southern  states.  North  Carolina  intro- 
duced the  change  in  1889,  when  a  law  was  enacted  providing 
that  in  case  for  any  reason  the  general  property  tax  should  not 
be  imposed  on  a  railway,  it  should  be  subject  to  a  tax  of  1% 
on  its  gross  earnings.  In  1899  this  alternative  provision  seems 
to  have  been  dropped,  but  in  1901  a  so-called  privilege  tax  on 
gross  earnings,  with  a  graded  scale,  was  introduced  which  is 
still  in  force  as  a  supplement  to  the  general  property  tax.  In 
Virginia  the  law  of  1842  imposed  a  tax  of  1}4%  on  dividends. 
In  1855,  as  amended  in  1859,  this  was  changed  to  a  tax  of  1  niill 
per  passenger  mile  plus  J/^  of  1%  on  gross  earnings  from  freight. 
In  1869  the  tax  was  again  changed  to  K  of  1%  on  tangible  prop- 
erty and  on  dividends.  In  1881  the  property  tax  continued  to 
be  levied  although  now  assessed  by  a  state  board,  but  was  sup- 
plemented by  a  so-called  occupation  tax,  levied  according  to 
net  earnings.  No  machinery,  however,  was  provided  to  enforce 
the  law  which  remained  a  dead  letter  until  1890  when  the 
requisite  machinery  was  instituted.  The  net  earnings  or  income 
tax  was  at  the  rate  of  1%,  and  it  was  provided  that  income 
should  be  ascertained  by  deducting  the  costs  of  operations, 
repairs  and  interest  on  indebtedness  from  the  gross  receipts. 
In  1902,  however,  the  income  tax  was  changed  to  a  tax  of  1%  on 
gross  receipts,  increased  in  1915  to  1  1/8%,  in  1916  to  1^%  and 
in  1918  to  1  5/16%,  which  is  still  in  force  and  which  is  levied  in 


THE  TAXATION  OF  CORPORATIONS 


177 


addition  to  the  property  tax.  In  Texas,  also,  a  tax  on  gross 
receipts  was  added  to  the  property  tax  in  1895,  but  limited  to 
the  receipts  from  passenger  traflSc.  In  1905,  however,  it  was 
extended  to  receipts  from  all  sources,  at  the  rate  of  1%.  Finally 
in  Mississippi  a  law  of  1880  provided  that  if  a  railroad  would 
pay  a  privilege  tax  of  from  S20  to  $70  per  mile  it  should  be 
exempted  from  the  general  property  tax  for  state  and  county 
purposes.  The  law  of  1890  increased  the  rates  in  this  alternative 
system  to  $50-$150  per  mile.  In  1892,  however,  a  privilege  tax 
on  railroads  was  imposed,  not  as  an  alternative,  but  as  an  addi- 
tion, to  the  property  tax.  The  law  divided  railroads  into  four 
classes,  with  a  tax  of  $2  to  $20  per  mile  according  to  the  class. 
This  law,  with  some  amendments,  is  still  in  force;  but  the  law 
of  1896  which  imposed  an  additional  privilege  tax  of  $10  per 
mile  on  railroads  claiming  exemption  from  state  supervision 
under  the  maximum  and  minimum  provisions  in  the  charter 
was  abolished  in  1912. 

After  this  hasty  glimpse  at  some  of  the  typical  forms  of  de- 
velopment, let  us  now  study  the  existing  chaos.  Chaos  we 
say,  because  the  remark  of  the  railroad  tax  committee  of  1879 
still  holds  good  to-day,  that  ''there  is  no  method  of  taxation 
possible  to  be  devised  which  is  not  at  this  time  applied  to  rail- 
road property  in  some  part  of  this  country.  A  more  discourag- 
ing example  of  general  confusion  could  hardly  be  imagined."  ^ 

(6)  Actual  Conditions 

As  stated  above  ^  nine  commonwealths  have  abandoned  prop- 
erty, in  the  sense  of  the  summation  of  the  actual  tangible  and 
intangible  assets,  as  the  basis  of  the  tax,  and  six  others  have 
abandoned  property  as  the  sole  basis.  Of  these  the  majority 
now  assess  railways  on  earnings.  Five  states — California, 
Connecticut,  Maine,  Maryland  and  Minnesota — levy  a  tax  on 
gross  earnings  only.  In  two  of  these  five  the  tax  is  graded.  In 
Maine  the  excise  tax  is  levied  at  the  following  rates:  on  gross  re- 
ceipts less  than  $1,500  per  mile,  }4  of  1%;  from  $1,500  to  $1,900 
per  mile,  ^  of  1%;  and  for  each  additional  $400  per  mile  or 
part  thereof,  ]4  of  1%  additional  xintil  the  rate  equals  53^%. 
In  the  case  of  railroads  operated  solely  for  freight  the  maximum 
limit  is  3%.  In  Maryland  the  so-called  franchise  tax  is  im- 
posed at  the  rate  of  l}4%  on  the  first  $1,000  earnings  per 

^  Taxation  of  Railroads  and  Railroad  Securities,  p.  1. 
^  Supra,  p.  151. 


I 


m  t 


In 


I 


I 


I! 


178 


ESSAYS  IN  TAXATION 


mile;  2%  on  earnings  from  SI, 000  to  $2,000;  and  2^%  on 
earnings  above  $2,000  per  mile.  In  the  three  other  states- 
Connecticut,  California  and  Minnesota— the  gross  earnings 
taxes  are  levied  at  the  fixed  rate  of  33^,  7  and  5  per  cent  respec- 
tively. 

Three  commonwealths— Massachusetts,  New  York  and  Penn- 
sylvania—include railroads  in  the  general  corporation  tax.  New 
York  and  Pennsylvania,  however,  levy  an  additional  tax  on 
intra-state  gross  earnings  (one-half  and  eight-tenths  of  one  per 
cent  respectively);  while  Massachusetts  also  levies  an  income 
tax  of  M  oi  1  per  cent  as  well  as  a  commission  tax  on  gross 
earnings  hi  proportion  to  mileage.  In  Pennsylvania  rail- 
roads are  therefore  now  sul)ject  to  the  general  corporation 
tax  on  capital  stock  as  measured  by  dividends,  to  the  tax  on 
corporate  loans  at  the  rate  of  four  mills,  and  to  the  tax  on  gross 
receipts  at  the  rate  of  8/10  of  1%.  They  are  also  subject  to  the 
payment  of  the  so-called  bonus  on  charters.^ 

There  remains  one  conmionwealth- Delaware — which  levies 
six  separate  taxes,  viz.,  on  capital  stock  (one  per  cent),  net 
earnings  (ten  per  cent),  locomotives  ($100  each),  passenger 
cars  ($25),  freight  cars  ($10)  and  passengers  (ten  cents  each). 
The  companies  may,  however,  pay  a  gross  sum  in  conmmtation 

of  the  passenger  tax. 

In  addition  to  the  commonwealths  which  have  broken  en- 
tirely with  the  attempt  to  tax  railways  on  tangible  and  in- 
tangible property,  ^ix  states  which  retain  the  property  tax  as 
the  main  feature  add  other  taxes  not  based  on  property.  Missis- 
sippi imposes  additional  privilege  taxes  at  a  fixed  sum  per  mile, 
according  to  the  reputed  wealth  or  earning  capacity  of  each 
road.  There  are  five  classes:  first,  second,  third,  narrow  gauge 
and  levee  district  roads,  the  tax  varying  from  $2.50  to  $45  per 
mile.  Ohio  levies,  in  addition  to  the  property  tax,  four  per  cent 
on  the  gross  earnings  from  mtra-state  business  only.  Rhode 
Island  levies,  in  addition  to  the  tax  on  tangible  property,  a 
tax  of  one  per  cent  on  the  proportionate  part  of  the  gross  earn- 
ings within  the  state,  as  fixed  by  relative  mileage.  Tennessee 
imposes  since  1919  a  so-called  inspection  and  supervision 
fee  on  all  public  utilities,  graded  from  $10  to  $500  according 
to  gross  receipts  in  excess  of  $5,000  with  the  maximum  fee 
applicable  to  gross  receipts  over  $3,000,000.  Texas  levies  a 
tax  of  one  per  cent  on  the  gross  receipts  from  passenger  eam- 

1  Cf.  infra,  p.  215. 


H 


THE  TAXATION  OF  CORPORATIONS 


179 


ings.  Virginia  imposes  a  state  franchise  t§ix  of  1  5/16  per  cent  on 
gross  receipts  within  the  state.  Virginia  also,  like  Alabama 
and  a  number  of  other  states,  levies  a  tax  to  defray  the  expenses 
of  the  railroad  commissioner,  apportioned  to  the  railways  ac- 
cording to  gross  receipts.  Again,  in  some  of  the  Southern  states 
we  find  special  licenses  levied  on  railroads,  as  in  Florida  where  a 
license  tax  of  $10  per  mile  is  imposed,  the  proceeds  being  divided 
between  the  state  and  the  counties,  with  additional  local  flat 
licenses  of  from  $10  to  $250  according  to  population;  or  in 
South  Carolina  where  a  "  license  fee"  of  three  mills  is  imposed  on 
the  ''gross  income"  of  railroads.  In  Mississippi,  Missouri, 
North  Carolina  and  North  Dakota  railroads  are  subject  not 
only  to  the  property  tax  but  also  to  the  recently  levied  general 
corporate  income  tax  and  in  Montana  to  the  1%  income  tax  on 
all  public  utilities,  levied  under  the  name  of  license  fee.  In 
Massachusetts,  also,  railroads  have  been  included  from  year  to 
year,  as  an  exceptional  measure,  in  the  general  income  tax  on 
corporations.^  In  North  Carolina  where  railroads  were  formerly 
subject  to  an  additional  graded  tax  on  gross  earnings,  this  was 
later  changed  to  a  mileage  tax  and  again  in  1921  to  a  franchise 
tax  of  1/10  of  1%  of  the  value  as  ascertained  by  the  State  Tax 
Commission.  This  is  in  addition  to  the  corporate  income 
tax.  Finally  we  find  in  a  few  conmionwealths,  like  Delaware, 
Illinois,  Maryland,  New  Jersey,  North  Carolina  and  Pennsyl- 
vania special  taxes  levied  on  special  railways. 

In  considering  the  newer  methods  of  railway  taxation  we 
should  in  reality  add  many'  states  which,  although  included 
under  the  head  of  the  ad  valorem  system,  yet  attempt  to  assess 
the  value  of  the  franchise.  The  term  ad  valorem  system  is  in 
fact  deploral)ly  inexact.  As  commonly  understood  it  means 
a  system  of  ascertaining  the  value  of  the  railway  as  a  piece 
of  property,  so  that  it  may  be  put  on  a  par  with  other  property. 
A  valuation  reached  by  adding  together  the  real  and  the  per- 
sonal property  of  the  railway  is  without  doubt  an  ad  valorem 
method.  A  valuation  reached  by  taking  into  account  also 
the  value  of  the  stock  and  bonds  would  likewise  generally  be 
considered  an  ad  valorem  method.  Yet  a  tax  like  that  until 
recently  in  Connecticut  where  only  the  value  of  the  stocks  and 
bonds  was  admitted  was  called  a  specific  and  not  an  ad  valorem 
tax.  So  again  the  tax  on  receipts  is  termed  a  specific  tax;  yet 
when  an  attempt  is  made  to  ascertain  the  value  of  the  franchise 
*  Cf.  for  these  income  taxes,  infra,  p.  211. 


180 


ESSAYS  IN  TAXATION 


and  to  estimate  it  on  the  basis  of  gross  receipts,  it  is  sometinies 
included  in  the  ad  valorem  system  simply  because  the  franchise 
is  treated  as  property.  The  whole  subject  of  franchise  taxation 
will  be  discussed  later;  but  it  may  l)e  affirmed  here  that  when  the 
value  of  the  franchise  is  reached  by  considering  only  or  chiefly 
the  earnings,  as  is  the  case  in  New  Jersey,  Michigan,  Wisconsin 
and  several  other  states,  we  are  really  departing  from  the  ad 
valorem  tax  considered  as  a  tax  on  property.  For  a  tax  upon 
property,  as  based  upon  or  measured  by  earnings,  is  really  a 
tax  on,  or  according  to,  earnings.  For  instance,  in  New  Jersey 
the  assessors  at  one  time  endeavored  to  estimate  the  franchise 
by  taking  sometimes  an  arbitrary  proportion  (sixty  per  cent) 
of  the  surplus  of  the  value  of  the  capital  stock  and  total  in- 
debtedness over  the  value  of  the  tangible  property,  sometimes 
a  percentage  (twenty  per  cent)  of  the  gross  earnings. 

In  Michigan,  as  we  shall  see  later,  after  the  tangible  property 
had  been  assessed,  the  so-called  Cooley-Adams  method  sought 
to  reach  the  value  of  the  franchise  by  a  laborious  computation 
designed  to  ascertain  the  actual  net  earnings,  which  were  then 
capitalized  at  various  rates  for  the  different  railways.  It  is 
evident  that  a  tax  on  franchise  reached  by  capitalizing  earnings 
is  nothing  but  a  tax  on  earnings.  We  are  not  here  discussing 
which  system  is  preferable.  We  desire  simply  to  point  out  that 
a  tax  on  the  property  value  of  the  franchise,  measured  by  earn- 
ings, is  really  an  indirect  tax  on  earnings;  and  that  a  so-called 
ad  valorem  tax  based  on  earnings  is  therefore  scarcely  distin- 
guishable in  theory  from  a  specific  tax  on  earnings.  This  is 
more  or  less  true  of  the  states  which  like  Michigan,  North  Da- 
kota, Wisconsin  and  Vermont  have  replaced  the  tax  on  earnings 
by  an  ad  valorem  tax  assessed  on  the  property  as  a  unit  by  a 

state  board.  ,   .     i_ 

An  important  point  in  the  treatment  of  railroads  is  the  extent 
to  which  these  new  methods  of  state  taxation  have  superseded 
local  taxation.  In  no  case  is  the  special  railroad  tax  declared 
to  be  in  Heu  of  all  other  taxation,  state  or  local;  although  it  was 
and  is  virtually,  though  not  technically,  true  in  Connecticut. 
For  under  the  former  law  if  the  real  estate  not  used  for  railroad 
purposes  was  taxable  locally,  the  valuation  on  which  the  state 
tax  was  based  was  reduced  by  the  amount  of  local  taxes;  and 
under  the  new  law  of  1915,  while  the  localities  have  the  right  to 
tax  the  real  estate  not  used  exclusively  in  the  business,  the  local 
taxes  may  be  deducted  from  the  state  tax  on  gross  receipts.    In 


THE  TAXATION  OF  CORPORATIONS 


181 


four  cases— Maine,  Maryland,  Massachusetts  and  New  York— 
the  local  bodies  may  tax  railroad  property,  but  with  some  restric- 
tions. In  Maine,  only  the  buildings  of  the  railroad  and  the  lands 
and  fixtures  outside  the  located  right  of  way  are  taxable  locally. 
Each  city  or  town,  however,  in  which  any  stock  of  the  railroad  is 
held  is  entitled  to  an  amount  equal  to  one  per  cent  of  the  value  of 
such  stock  as  detennined  by  the  state  board.  In  Massachusetts, 
the  railroads  are  taxable  locally  only  on  their  real  estate  (except  a 
belt  of  land  adjoining  the  roadbed  with  the  structures  con- 
nected with  it)  and  machinery.  But  as  the  value  of  this  prop- 
erty is  deducted  from  the  total  valuation  for  the  commonwealth 
tax,  Massachusetts  belongs,  strictly  speaking,  in  the  preceding 
category.  In  Mississippi,  only  cities  and  towns  have  the 
privilege  of  taxing  railroad  property  in  general,  but  all  local 
divisions  may  tax  that  part  which  is  not  used  for  railroad  pur- 
poses. In  New  York,  under  the  general  corporation  tax  law, 
the  real  estate  of  railroads  is  taxable  for  state  purposes;  and 
both  realty  and  personalty  (except  intangible  personalty)  are 
taxable  for  local  purposes  according  to  the  primitive  methods 
of  the  locally  assessed  property  tax.  Railways  are  also  subject 
to  the  special  franchise  tax,^  which,  although  assessed  by  a 
state  board,  accrues  to  the  -locality.  Finally,  in  California, 
Minnesota,  Pennsylvania  and  Vermont — the  railroads  are  sub- 
ject to  a  local  tax  only  on  that  part  of  their  property  not  used 
for  railroad  purposes.  In  California  the  operative  property 
which  is  not  subject  to  local  taxation  is  expressly  defined  in  the 
law  of  1910.  In  Pennsylvania,  all  property  necessary  to  the 
successful  operation  of  the  railroad  including  stations,  water 
tanks,  etc.,  but  not  city  offices,  has  been  held  to  be  a  part  of 
the  franchise,  and  therefore  not  locally  taxable.  But  in  Pitts- 
burgh all  real  estate,  and  in  Philadelphia  all  real  estate  ex- 
cept the  superstructure  of  the  roads  and  the  water  stations, 
is  locally  taxable.  Attention  has  also  been  called  above  to  the 
New  Jersey  system  whereby  all  operative  real  estate  except  the 
main  stem,  and  all  non-operative  realty  pay  the  full  local 
rate. 

Summing  up  the  American  system  of  railroad  taxation  we 
see  that  there  are  five  principal  methods: 

1.  The  primitive  system  of  the  general  property  tax,  with 
local  assessment.  Although  this  has  well-nigh  disappeared  for 
state  taxation  in  general,  at  least  as  the  exclusive  system,  it  is 

^  Infra,  p.  225. 


It 


IS 


Rllli 


III 


182 


ESSAYS  IN  TAXATION 


still  found  for  purposes  of  local  taxation  in  many  states,  in- 
cluding New  York. 

2.  The  ad  valorem  system,  including  at  least  a  valuation  of  the 
tangible  property,  but  involving  assessment  by  a  state  board. 
This  is  the  system  in  a  majority  of  the  states. 

3.  The  ad  valorem  system,  including  a  valuation  of  the  fran- 
chise based  in  whole  or  in  part  on  one  of  the  two  following 
methods.    This  is  becoming  the  rule  in  a  large  number  of  states. 

4.  The  system  of  specific  valuation  through  the  stock-and- 
bond  method  or  some  modification  of  the  same.  This  is  found 
in  onlv  a  few  states. 

5.  the  taxation  of  earnings— either  gross  earnings  or  net 
earnings  or  income.    This  is  found  in  about  a  third  of  the  states. 

This  survey  will  suffice  for  a  picture  of  the  existing  chaos. 
The  theory  and  criticism  must  be  left  to  a  subsequent  section. 

4.  Other  Public-Service  Corporations 

Next  in  order  after  the  railroads  to  break  away  from  the  gen- 
eral property  tax  were  the  corporations  which  it  has  become  the 
custom  in  recent  years  to  call  the  public  utilities  or  the  public- 
service  corporations.    Sometimes. the  term  transportation  and 
transmission  companies  is  applied  to  them.     In  the  broadest 
sense  this  term  is  defensible,  as  including  all  corporations  en- 
gaged in  the  transportation  of  passengers  and  freight  and  in  the 
transmission  of  light,  heat,  power,  sound,  or  intelligence.     In 
some  states,  however,  transportation  and  transmission  com- 
panies are  considered  only  a  part  of  the  broader  category  of 
public-service  corporations.     For  instance  in  New  York  the 
"additional  franchise  tax"  on  transportation  and  transmLssion 
companies  applies  only  to  ''railroad,  canal,  steamboat,  feriy, 
express,  navigation,  pipe  line,  transfer,  baggag;e  express,  tele- 
graph, telephone,  palace  car  or  sleeping  car"  and  "other  trans- 
portation" companies;  while  a  separate  tax  is  imposed  on  the 
other  public-service  corporations  which  are  specifically  desig- 
nated as  "elevated  railroads,  surface  railroads  not  operated  by 
steam,  corporations  for  supplying  water  or  gas,  or  for  electric 
or  steam  heating,  lighting  or  power  purposes."    The  latest  def- 
inition of  public-service  corporations  is  contamed  m  the  Rhode 
Island  law  of  1912,  which  taxes  "express,  steamboat  or  ferryboat 
companies;  steam  and  electric  railroads;  street  railways;  dmmg, 
sleeping,  chair  or  parlor  car  companies;  telegraph,  cable  and 


ESSAYS  IN  TAXATION 


183 


telephone  companies;  companies  for  selling  gas,  water  or  elec- 
tricity for  light,  heat  or  power  purposes."  A  slighth^  different 
definition  is  that  of  the  Nebraska  law,  which  includes  among 
the  public-utility  corporations  "street  railway  corporations, 
street  railways,  water  works,  electric  light  and  gas  works, 
natural  gas,  mining  and  all  other  like  corporations."  Another 
definition  of  public-utility  companies,  apart  from  transporta- 
tion companies  is  afforded  by  the  Wisconsin  law  of  1911. 
They  are  defined  as  companies  for:  (a)  generating  and  furnishing 
gas  for  lighting  or  fuel  or  both;  (b)  supplying  water  for  domes- 
tic or  public  use  or  for  power  or  manufacturing  purposes; 
(c)  generating,  transforming,  transmitting  or  furnishing  electric 
current  for  light,  heat  or  power;  (d)  generating  or  furnishing 
steam  or  supplying  hot  water  for  heat,  power  or  manufacturing 
purposes;  (e)  improving  the  navigation  of  public  streams  or 
other  public  waters;  (f)  conserving  and  regulating  the  height 
and  flow  of  water  in  public  reservoirs. 

South  Carolina  also  has  a  definition  of  public-service  corpora- 
tions which  includes  in  addition  to  some  of  those  mentioned 
al)ove  "navigation  companies."  In  some  of  the  other  states, 
with  less  inclusive  lists,  other  public-service  corporations  are 
occasionally  mentioned,  like  oil  pipe  lines,  bridge  companies,  toll 
road  companies,  messenger  companies,  press  despatch  com- 
panies, sewer  companies,  elevator  companies,  signal  companies, 
dockage  or  cranage  companies,  heating  and  cooling  companies, 
freight  line  and  equipment  companies,  and  terminal  companies. 
All  these  corporations  are  deemed  to  differ  from  ordinary  busi- 
ness corporations  in  the  possession  of  some  special  privilege  in 
the  use  of  the  land,  or  in  the  right  of  constructing  pipes  beneath 
the  land  or  laying  wires  above  the  land. 

In  many  of  the  states  these  corporations  are  still  taxed  ac- 
cording to  the  ineffective  methods  of  the  general  property  tax 
with  local  assessment.  In  several  states  they  are  now  taxed  ac- 
cording to  the  ad  valorem  system  by  a  state  board  and  not  infre- 
quently according  to  the  so-called  unit  rule.^  In  not  a  few  states, 
however,  specific  taxes  are  imposed  on  such  comi)anies.  In  a 
few  states,  like  Montana,  South  Carolina,  Tennessee  and  West 
Virginia,  all  these  public-service  corporations  are  subject 
to  a  special  tax  of  the  same  kind  and  amount.  In  other  states, 
like  California,  the  method  is  the  same  but  the  rates  differ. 
In  most  of  the  states,  however,  both  rates  and  methods  vary. 

*  CJ.  supra,  p.  150. 


r 

'I 


184 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


185 


On  the  whole,  more  progress  has  been  made  here  than  in  the 
case  of  the  railroads  which  were  the  first  of  the  pubUc-service 
corporations  to  break  away  from  the  old  system.  We  shall 
mention  them  in  the  order  in  which  they  have  begun  to  assume 
importance  from  the  fiscal  point  of  view. 

The  taxation  of  telegraph  companies  has  undergone  an  evolu- 
tion similar  to  that  of  railroads,  but  in  some  respects  more  com- 
plicated. In  a  large  number  of  conunonwealths  telegraph  prop- 
erty is  still  included  by  the  local  assessors  in  the  general  tax  list, 
and  pays  the  regular  rate  of  the  property  tax.  In  a  smaller  num- 
ber of  states,  like  Indiana,  Illinois,  Iowa,  Kansas,  Kentucky, 
New  Hampshire  and  Tennessee,  the  ad  valorem  system,  ad- 
ministered by  a  state  board,  is  employed,  frequently  accord- 
ing to  the  unit  rule.  In  a  few  cases  again,  like  Nebraska, 
where  the  value  of  the  franchise  is  separately  assessed,  the 
calculation  is  made  on  the  basis  of  gross  receipts,  so  that  the 
system  ought  really  to  be  likened  to  that  now  to  be  mentioned. 
About  one-half  of  the  states,  however,  have  broken  away  from 
the  ad  valorem  or  property  system  and  have  substituted  one 
based  on  gross  receipts  or  on  mileage. 

The  gross  receipts  system  is  found  in  seventeen  states,  in  two 
of  which  the  tax  is  graded.     The  rate  of  the  gross  receipts 
tax  is  3  mills  in  South  Carolina,  5  mills  in  New  York,  8  mills  in 
Pennsylvania,  one  per  cent  in  Delaware  and  New  Mexico,  2 
per  cent  in  Ohio  and  Rhode  Island;  2  1/8  per  cent  in  Virginia; 
2H  per  cent  in  Maryland;  2Ji  per  cent  in  Texas;  3  per  cent  in 
Connecticut,  Louisiana  and  Michigan;  4  per  cent  in  Oklahoma; 
4}4  per  cent  in  Vermont;  5  per  cent  in  New  Jersey  and  5}4  per 
cent  in  California.    In  Louisiana  the  tax  applies  only  to  foreign 
companies,  domestic  companies,  if  any,  l)eing  taxable  on  their 
property.    In  Maine  the  rates  are  graded  from  1 J4  to  6  per  cent. 
The  Maine  tax  is  in  lieu  of  all  taxes  on  property  except  the  local 
tax  on  real  estate.    Moreover,  in  Maine  it  is  provided  that  the 
state  should  apportion  to  the  respective  localities  a  sum  equiv- 
alent to  one  per  cent  on  the  value  of  the  corporate  stock  held 
by  resident  owners.    In  the  above  list,  six  states— Louisiana, 
Ohio,  New  Jersey,  New  York,  South  C'arolina  and  Virginia — 
add  to  the  gross  receipts  tax  a  tax  on  property;  Maiyland 
adds  to  the  gross  receipts  tax  a  tax  on  shares;  and  two— New 
York  and  Pennsylvania— add  the  general  corporation  taxes 
on  capital  stock  or  on  stock  and  bonds.    In  Vermont  the  tax 
on  receipts  is  alternative— at  the  option  of  the  corporation— 


with  the  tax  on  mileage,  to  be  mentioned  in  the  next  para- 
graph. 

As  contrasted  with  the  states  that  levy  a  gross  receipts  tax, 
nine  states  im[)ose  a  tax  proportioned  to  mileaige.  In  five  of 
these  the  tax  is  a  fixed  amount:  in  Florida  65  cents  per  mile;  in 
Vermont  65  cents  per  mile  of  poles  and  one  line  of  wire,  and  56 
cents  per  mile  of  each  additional  wire;  in  North  Carolina  $5  per 
pole  mile  together  with  flat  local  licenses  graded  from  $10  to 
$50  according  to  population ;  in  Virginia  $2  per  mile  of  poles  and 
conduits  and  in  West  Virginia  (for  foreign  companies)  $1  per 
mile.  In  the  other  four  states  the  tax  is  graded:  in  Alabama  the 
tax  is  $1  per  mile  if  the  line  is  not  over  150  miles,  and  $500  plus 
$1  per  mile  if  over  150  miles.  In  Delaware  the  tax  is  60  cents 
per  mile  for  the  longest  wire,  30  cents  for  the  next  longest,  and 
20  cents  for  any  other.  In  Mississippi  the  tax  is  35  cents  per 
mile  together  with  a  property  tax.  In  Tennessee  the  tax  is 
graded  from  $20  to  $1700  with  an  additional  $10  for  each 
100  miles  over  6,000. 

Of  these  nine  states  four — ^Alabama,  North  Carolina,  Tennes- 
see and  West  Virginia — also  levy  a  tax  on  property;  Delaware, 
as  stated  above,  also  levies  a  tax  on  gross  receipts;  Tennessee 
levies  in  addition  the  inspection  and  supervision  fee  applicable  to 
all  public  utilities;  while  Virginia  imposes  all  three  taxes — a 
property  tax,  a  gross  receipts  tax  and  a  mileage  tax.  Vermont, 
as  stated  above,  has  an  alternative  system — a  tax  on  gross 
receipts  or  on  mileage. 

In  addition  to  the  gross  receipts  and  the  mileage  systems  we 
find  in  a  few  cases  other  methods.  In  a  few  of  the  Southern 
states  we  find  a  flat  license,  as  in  Florida  where  it  is  fixed  at 
$500.  In  Massachusetts  telegraph  companies  are  included  in 
the  general  corporation  tax  and  in  Mississippi,  Missouri,  Mon- 
tana, North  Carolina  and  North  Dakota  they  are  subject  to  an 
income  tax  in  addition  to  the  property  tax. 

In  a  very  few  cases  only  has  any  state  abandoned  the  gross 
receipts  tax.  In  Minnesota  a  mileage  tax  was  first  imposed 
in  1867,  but  was  replaced  in  1887  by  a  gross  receipts  tax.  In 
1891,  however,  the  ad  valorem  system  was  introduced.  So 
Wisconsin  replaced  the  gross  receipts  tax  by  the  ad  valorem 
system  in  1905  and  Michigan  in  1909.  In  Ohio  there  was  a  net 
receipts  tax  in  1862,  changed  to  a  gross  receipts  tax  in  1865.  In 
1893  this  was  abandoned  and  the  ad  valorem  system  was  intro- 
duced; but  in  1902  this  was  supplemented  by  the  excise  tax  on 


Il 


II 


186 


ESSAYS  IN  TAXATION 


gross  receipts.  In  Oregon  the  gross  receipts  tax  law  of  1906  was 
repealed  in  1909.  In  Georgia  there  was  formerly  a  gross  receipts 
tax,  imposed  whenever  the  property  tax  did  not  amount  to  two 
and  one-half  per  cent  of  gross  receipts.  This  method  was,  how- 
ever, declared  unconstitutional  in  1906.  On  the  other  hand, 
Alabama,  which  formerly  imposed  a  gross  receipts  tax,  sub- 
stituted, as  we  know,  a  mileage  tax.  The  general  tendency  on 
the  whole,  however,  has  been  toward  the  gross  receipts  tax. 

Telephone  campanies  have  naturally  been  subjected  to  special 
taxation  only  much  more  recently.    With  the  passage  of  time 
the  tendency  has  l)een  for  the  rate  of  the  tax  to  increase.    For 
instance,  in  Wisconsin  the  gross  receipts  tax  was  one  per  cent  in 
1883,  VA  per  cent  in  1885,  2M  per  cent  in  1891,  2}i  to  3  per 
cent  in  1897,  2^  to  4  per  cent  in  1905  and  2J^  to  5  per  cent  m 
1911.    In  Mmnesota  a  2  per  cent  gross  receipts  tax  was  imposed 
in  1887;  in  1891  this  was  al)andoned  for  an  ad  valorem  tax;  but 
in  1897  the  gross  receipts  tax  was  restored  at  a  higher  rate — 
3  per  cent.    In  Ohio  telephone  companies  were,  like  telegraph 
companies,  subjected  to  a  net  receipts  tax  in  1862  which  under- 
went the  same  changes  as  those  mentioned  in  the  last  paragraph, 
except  that  the  supplemental  gross  receipts  tax  which  was  im- 
posed at  the  rate  of  1%  in  1902  was  increased  to  1.2%  in  1910. 
At  present,  the  tax  on  telephone  companies  is  the  same  as 
that  on  telegraph  companies  in  a  few  states;  but  in  many  com- 
monwealths either  the  rate  or  the  method  is  different.     The 
gross  receipts  tax  is  found  in  twenty-one  states.    The  rate  of  the 
tax  is  as  follows:  3  mills  in  South  Carolina;  5  mills  in  Louisiana, 
New  York  and  Oklahoma;  8  mills  in  Pennsylvania;   1%  in 
Arizona  and  Delaware;  1.2%  in  Ohio;  1^%  in  Texas;  2%  in 
Maryland  and  Rhode  Island;  3%  in  North  Carolma  and  Ver- 
mont; 4%  in  Connecticut;  5%  in  IMinnesota  and  New  Jersey; 
and  51  <;%  in  California.    In  three  states  the  tax  is  graded:  in 
Mahie  the  grades  and  rates  are  the  same  as  in  the  case  of  tele- 
graph companies,  explained  above.     In  Virginia  the  rate  is 
1  1/10%  when  (a)  gross  receipts  do  not  exceed  $50,000  a  year, 
and  (b)  when  the  pole-mileage  is  not  above  600;  otherwise  (c)  the 
rate  is  1  1/16%  on  gross  receipts  to  $50,000  and  2  1/16%  on 
receipts  in  excess  of  that  sum.     In  Wisconsin  the  so-called 
license  fee  is  23^%  if  gross  earnings  are  under  $100,000,  3% 
between  $100,000  and  $300,000,  4%  between  $300,000  and 
$500,000  and  5%  if  over  that  sum;  and  it  is  provided  that 


'  \\ 


i 


THE  TAXATION  OF  CORPORATIONS 


187 


15%  of  the  revenue  should  accrue  to  the  localities.  In  North 
Carolina  the  rate  of  tax  is  reduced  if  a  certain  proportion 
of  the  assets  of  the  corporation  is  invested  in  state  or  local 
bonds  of  North  Carolina:  if  the  proportion  is  one-quarter, 
the  rate  is  reduced  to  13^%;  if  one-half,  the  rate  is  1%;  and  if 
three-quarters  of  the  total  assets  are  so  invested,  the  rate  is 
only  A  of  !%•  Tennessee  includes  telephone  companies 
in  the  inspection  and  supervision  fee,  levied  according  to  gross 
receipts,  on  all  public  utilities.  On  the  other  hand,  Michigan 
and  Oregon  abandoned  the  gross  receipts  tax  in  1909  and  re- 
placed it  with  the  ad  valorem  system. 

Of  the  above  states,  four — New  Jersey,  Ohio,  South  Carolina 
and  Tennessee — add  to  the  receipts  tax  a  tax  on  property; 
and  Virginia  adds  a  tax  on  property  and  a  tax  on  mileage. 
Two  states — New  York  and  Pennsylvania — add  the  general 
corporation  taxes  on  capital  stock  or  on  stock  and  bonds;  while 
Vermont  permits  as  an  alternative  the  tax  on  mileage. 

As  contrasted  with  these  twenty-one  states,  six  common- 
wealths impose  a  tax  on  mileage,  several  of  them  combining 
with  the  mileage  tax  other  taxes.  Alabama  levies  a  privilege 
tax  of  25  cents  a  mile  if  the  length  of  the  wires  is  less  than 
50  miles;  but  otherwise  imposes  a  tax  of  $1,000  plus  $2  a  mile 
and  in  each  case  also  levies  the  property  tax  and  local  licenses 
from  $5-25.  Delaware  levies  a  tax  of  60  cents  per  mile  of  wire, 
for  the  longest  wire,  30  cents  per  mile  for  that  next  in  length,  and 
20  cents  per  mile  for  all  others;  together  with  a  tax  of  25  cents 
per  transmitter.  Mississippi  levies  a  flat  tax  of  from  $2,50  to 
$250  on  each  t^elephone  exchange,  graded  according  to  the  num- 
ber of  subscribers  and  to  the  number  of  miles  of  poles.  Virginia 
imposes  a  tax  of  $2  per  mile,  in  addition  to  the  property  tax  and 
to  the  receipts  tax.  Vermont  levies  a  mileage  tax  like  that  on 
telegraph  companies,  and  permits  in  lieu  of  this  the  gross  receipts 
tax  mentioned  above.  West  Virginia  levies  a  tax  of  $1  per  mile 
in  addition  to  the  property  tax. 

In  a  few  states  we  find  taxes  apportioned  to  the  instruments 
used.  Thus  Montana  imposes  a  tax  of  75  cents  per  transmitter, 
while  Florida  and  Tennessee  grade  the  tax.  In  Florida  the 
tax  is  10  cents  per  transmitter  up  to  1,000  transmitters,  8  cents 
up  to  2,000,  6  cents  up  to  3,000.  In  Tennessee  the  tax  is  from 
20  to  50  cents  per  transmitter,  graded  according  to  the  popula- 
tion, in  addition  to  the  property  tax.  Moreover,  as  intimated 
above,  Delaware  also  employs  this  method  in  part.    Finally, 


188 


ESSAYS  IN  TAXATION 


\l 


I 


telephone    companies    are   subject    in    Mississippi,    Missouri, 
Montana,  North  Carolina  and  North  Dakota  to  an  income  tax. 

In  the  case  of  express  companies  the  states  have  as  a  rule 
departed  from  the  property  tax  system  to  an  even  greater  ex- 
tent than  in  the  preceding  cases.    Only  a  few  states  have  re- 
verted to  the  ad  valorem  system,  and  there  frequently  because 
of  a  constitutional  defect  in  the  particular  method  employed. 
For  instance,  Iowa  started  in  1868  with  a  tax  on  the  personal 
property  of  express  companies  which  was  declared  to  be  equal 
to  40%^  of  their  gross  receipts.    In  1870  Iowa  reverted  to  the 
general  property  tax,  but  in  1896  again  imposed  a  gross  re- 
ceipts tax  at  the  rate  of  1%,  which  was  increased  in  1898  to  2%. 
In  1900,  however,  this  tax  was  overturned  by  the  Supreme 
Court,  and  Iowa  now  adopted  the  ad  valorem  system  with  the 
unit  rule.    In  Georgia  also  the  alternative  gross  receipts  tax. 
first  levied  in  1901,  was  abandoned  in  1908  owing  to  a  court 
decision.    In  Michigan  the  gross  receipts  tax  was  replaced  by 
the  ad  valorem  system  in  1901  and  in  Wisconsin  this  occurred 
in  1899.    Ohio  levied  a  net  receipts  tax  in  1862,  and  changed  in 
1865  to  a  gross  receipts  tax.    But  in  1893  the  ad  valorem  system 
was  established,  coupled,  however,  with  a  gross  receipts  tax  at 
2%,  changed  in  1902  to  1%,  and  again  raised  to  2%  in  1910. 

Many  more  states,  however,  have  on  the  contrary  during 
recent  years  abandoned  the  older  methods  for  the  gross  re- 
ceipts tax.  No  less  than  thirty  states  now  tax  express  com- 
panies according  to  gross  receipts.  The  rate  is  as  follows: 
3  mills  in  South  Carolina;  5  mills  in  New  York;  1  to  5%  in 
Pennsylvania;  1%  in  California  and  Louisiana;  114%  in  Mis- 
souri; 13^%  in  Virginia  and  West  Virginia;  2%  in  Connecti- 
cut, Florida,  Nebraska,  New  Jersey  and  Ohio;  2^%  in  Mary- 
land, Missouri,  Montana,  New  Jersey  and  Texas;  3%  in  Idaho, 
Oregon  and  Rhode  Island;  4%  in  Kansas,  Maine  and  Oklahoma; 
5%  in  New  Mexico,  Washington  and  Wyoming;  6%  in  Arizona 
and  Delaware;  and  8%  in  Minnesota.  Where  the  high  rates  are 
levied,  the  gross  receipts  tax  is  sometimes  in  lieu  of  all  taxes  on 
property,  as  in  Connecticut  and  Minnesota.  In  Kansas,  Rhode 
Island  and  Washington,  however,  the  corporations  are  taxable 
also  on  their  tangible  property.  In  California  they  are  taxable 
only  on  their  local  real  estate.  In  most  of  the  other  states  they 
are  subject  also  to  the  property  tax,  either  for  local  purposes, 
or  for  both  local  and  state  purposes,  as  in  Missouri,  Ohio, 


THE  TAXATION  OF  CORPORATIONS 


189 


South  Carolina  and  West  Virginia;  or  on  the  property  excluding 
the  franchise,  the  franchise  being  deemed  to  be  taxed  through 
the  receipts  tax.  In  New  York  and  Pennsylvania  express 
companies  are  also  subject  to  the  general  corporation  taxes. 
In  Wyoming  the  tax  is  divided  in  equal  proportions  between 
the  state  and  the  several  counties  in  which  the  company  op- 
erates. In  Louisiana  the  tax  seems  to  apply  only  to  domestic 
companies.^ 

As  compared  with  the  states  employing  the  gross  receipts 
tax  only  six  states  utilize  the  mileage  tax  for  express  companies. 
Alabama  levies  a  tax  of  $1  per  mile  where  the  express  lines  do 
not  exceed  500  miles,  but  thereupon  imposes  a  flat  tax  arranged 
in  classes,  the  maximum  tax  of  $5,000  being  paid  when  the 
mileage  is  over  4,000  miles.  Mississippi  levies  a  tax  of  $500 
plus  $6  a  mile  in  the  case  of  first  class  railroad  track,  or  $3  a 
mile  in  the  case  of  second  or  third  class  railroad  track  ~  over 
which  the  business  is  operated.  North  Carolina  imposes  a 
license  tax  ranging  from  $5  to  $7  a  mile  according  as  the  net 
earnings  are  less  than  6%  or  more  than  8%.  Towns  may  impose 
a  further  flat  license  tax  graded  from  $5  to  $75  according  to 
population.  Tennessee  imposes  a  tax  of  $1,000  on  all  companies 
with  lines  less  than  100  miles  long,  but  $2,500  where  the  length 
is  over  100  miles.  In  Tennessee  they  are  also  liable  to  the  inspec- 
tion and  supervision  fee  on  gross  receipts.  West  Virginia  im- 
poses a  tax  of  $1.50  per  mile  in  addition  to  the  property  tax. 
Vermont,  which  from  1880  to  1904  imposed  a  gross  earnings  tax, 
levied  in  that  year  a  tax  at  the  flat  rate  of  $8  per  mile,  in  lieu 
of  all  taxes  on  property.  This  arbitrary  tax  was  due  to  the 
refusal  of  the  companies  to  furnish  adequate  details  of  their 
business.  In  1912  the  rate  was  increased  to  $20  per  mile  and  in 
1915  reduced  to  $16  per  mile,  at  which  it  now  stands. 

In  addition  to  these  receipts  and  mileage  taxes  we  find 
sporadic  instances  of  other  methods.  Thus  Florida  levies  a 
flat  tax  of  $7,500  per  annum  in  lieu  of  all  state  and  county 
licenses,  but  permits  in  addition  city  or  town  licenses,  with 
rates  from  $6  to  $200.  In  Massachusetts  express  companies  are 
subject  to  an  excise  tax,  like  the  general  corporation  tax  on 
corporate  excess,  except  that  the  tax  instead  of  being  computed 
on  the  basis  of  capital  stock  alone,  is  computed  on  the  basis  of 


^  See  State  vs.  Pacific  Express  Co.,  121  La.  151. 
mond  Packing  Co.,  110  La.  180. 

2  For  an  explanation  of  these  terms  cf.  supra,  p. 


But  see  State  vs.  Ham- 


178. 


I  ; 


190  ESSAYS  IN  TAXATION 

the  shares,  bonds,  and  unfunded  debt,  and  with  the  further  ex- 
ception that  only  so  much  of  that  valuation  is  taken  as  the  gross 
receipts  within  the  state  bear  to  the  total  gross  receipts  In  Dela- 
ware express  companies  pay  an  annual  license  fee  of  $250  m  addi- 
tion to  the  gross  receipts  tax.  Finally  in  Mississippi,  Missouri, 
Montana,  North  Carolina  and  North  Dakota  express  companies 
are  subject  to  the  public  utilities  or  general  corporate  mcome  tax. 
In  some  states,  as  in  IVIaiyland  and  West  Virginia,  the  gross 
receipts  tax  applies  only  to  foreign  companies,  the  domestic 
companies  being  subject  to  the  general  property  tax.  As  a 
matter  of  fact,  however,  the  express  companies  are  foreign 
companies  in  most  of  the  states. 

From  the  fact  that  the  large  express  companies  are  generally 
unincorporated,  the  question  has  recently  arisen  whether  they 
are  liable  to  the  corporation  tax.  In  Vermont  and  Pennsylvajiia 
joint-stock  companies  are  expressly  included.  In  New  Jersey 
the  tax  law  applies  only  to  corporations.  In  New  York  cxpi-ess 
companies  have  been  declared  liable  to  the  state  corporation 
tax  because  the  statute  expressly  applies  to  joint-stock  com- 
panies; '  but  under  the  provisions  of  the  revised  statutes  mi- 
posing  a  tax  on  ''all  monied  or  stock  corporations  which 
still  governs  local  taxation  in  New  York,  it  has  been  held  that 
the  unincorporated  joint-stock  express  companies  are  not  liable 
to  local  taxation.^ 

Parlor   and  sleeping   car   companies  have   been   separately 
taxed  in  a  smaller  number  of  states.    In  some  states  like  Georgia 
the  ad  valorem  unit  rule  system  is  employed,  whereby  the 
ordinary  rate  of  the  property  tax  is  levied  on  that  proportion  ot 
the  entire  value  of  all  the  cars  of  the  company  which  the  state 
mileage  over  which  the  cars  are  run  bears  to  the  entire  mileage. 
In  fifteen  commonwealths  we  find  the  gross  receipts  tax,  m 
many  of  them  drawing  room,  dining,  chair  and  buffet  cars  bemg 
expressly  designated  as  included  in  the  general  category.    The 
rates  are  as  follows:  3  mills  in  South  Carolina;  ^  mills  m  New 
York-  8  mills  in  Pennsylvania;  1%  in  Rhode  Island;  lVz7o  in 
Delaware  and  Florida;  2%  in  New  Jersey;  23.2%  m  Maryland; 
3%  in  North  Carolina,  Oklahoma  and  Oregon;  5%  m  ]Mmn^ota 
and  Texas;  514%  in  California;  7%  in  Washington  and  9%  m 
Maine     In  several  of  these  states  an  additional  tax  on  property 
is  levied  as  in  Rhode  Island  and  South  Carolma.    In  Minnesota 


1 117  N.  Y.  136. 


133  N.  Y.  279. 


THE  TAXATION  OF  CORPORATIONS 


191 


the  tax  is  alternative  with'  a  property  tax.  In  Maryland  an 
additional  tax  is  levied  on  the  capital  stock  of  domestic  com- 
panies only.  In  Texas  an  additional  tax  of  34  of  1%  on  capital 
stock  is  levied  on  all  such  companies,  but  they  are  then  exempt 
from  all  other  taxes. 

As  contrasted  with  these  taxes  on  receipts,  several  states, 
principally  in  the  South,  impose  so-called  license  fees  or  privilege 
taxes  in  addition  to  the  property  tax.  In  Alabama  the  tax  is 
$8,000;  in  Florida  it  is  $5,500  together  with  a  tax  of  $10  per  mile, 
both  of  which  are  paid  in  addition  to  the  gross  receipts  tax; 
in  North  Dakota  the  tax  is  at  the  flat  rate  of  $100;  in  Tennessee 
the  tax  is  $3,000  in  lieu  of  all  other  taxes  except  on  property. 

The  mileage  tax  is  found  in  Mississippi,  which  levies  a  tax  of 
from  $2.50  to  $3.50;  in  Virginia,  which  levies  a  tax  of  $3.15  per 
mile  together  with  an  annual  registration  fee;  and,  as  stated 
above,  in  Florida.  Finally  there  may  be  mentioned  Ohio  which 
imposes  a  tax  of  1.2%  on  the  excess  of  the  value  of  the  capital 
stock,  as  proportioned  to  Ohio,  above  the  value  of  the  real  estate; 
and  Vermont  which  imposes  a  tax  of  1}4%  on  the  proportion  of 
the  capital  stock  invested  or  used  in  the  state.  In  Montana, 
Missouri  and  North  Dakota' they  are  also  liable  to  the  corporate 
income  tax;  and  in  Tennessee  to  the  inspection  and  supervision 
fee  on  gross  receipts. 

In  addition  to  the  palace  and  sleeping  car  companies  tax  we 
find  separate  mention  made  of  other  car  companies  in  seventeen 
states  which  impose  a  special  tax.  Alabama  taxes  freight  or 
equipment  companies  3%  on  gross  income;  Arkansas  imposes 
an  excise  or  privilege  tax  of  5%  on  the  gross  receipts  of  all 
private  car  companies;  California  taxes  refrigerator,  oil,  stock, 
fruit  and  other  car-loaning  companies  at  the  rate  of  53^%  on 
their  gross  receipts;  Connecticut  taxes  car  companies  3%  on 
gross  receipts;  Maryland  taxes  freight  lines  2%  on  gross  re- 
ceipts; Minnesota  imposes  a  tax  of  6%  on  the  gross  receipts 
of  freight  line  companies,  which  are  defined  as  companies 
engaged  in  operating  box,  flat,  coal,  ore,  bank,  stock,  gondola, 
furniture,  refrigerator  or  other  cars  over  any  railroad  line; 
Mississippi  taxes  car  equipment  companies  3%  on  gross  re- 
ceipts in  lieu  of  the  property  tax;  Montana  taxes  private  car 
companies  5%  and  North  Carolina  3%  on  gross  receipts;  North 
Dakota  taxes  freight  lines  and  car  equipment  companies  6%  on 
their  gross  receipts;  Oklahoma  taxes  stock  car,  refrigerator  car, 
and  other  private  car  companies,  car  trusts  and  car  associations 


IHI  * 


192 


ESSAYS  IN  TAXATION 


!l!f' 


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at  the  rate  of  4%  on  gross  receipts;  Oregon  taxes  refrigerator  cars 
3%;  Rhode  Island  taxes  car  companies  1%;  Texas  taxes  stock, 
refrigerator,  fruit  and  other  car  companies  3%;  Vermont 
imposes  a  tax  of  2J/^%  on  the  gross  earnings  of  car,  steamboat 
and  transportation  companies  as  an  alternative  to  the  tax 
of  1)4%  on  appraisal;  Virginia  taxes  car  companies  4J4%;  and 
Washington  levies  a  tax  of  7%  on  the  gross  receipts  of  car  com- 
panies in  addition  to  a  tax  on  their  tangible  property. 

The  next   class   of   public-service   corporations   which   are 
sometimes  taxed  in  a  special  way,  is  composed  of  street  rail- 
ways.    These  are  specifically  mentioned   in  thirteen   states. 
In  Tennessee  they  are  taxed  on  mileage,  the  privilege  tax  being 
graded  from  $3  to  $10  per  mile  of  track  according  to  the  popula- 
tion.    In  the  other  states  the  tax  is  levied  on  gross  receipts. 
The  rates  are  as  follows:  2  mills  together  with  local  licenses  not 
exceeding  2%  in  Alabama;  3  mills  in  South  Carolina;  1%  in 
New  York  and  Rhode  Island;   1.2%  in  Ohio;  43^%   (after 
1921,  3%)  in  Connecticut  and  5J^%  in  California.     In  New 
York,  however,  they  pay  in  addition  3%  upon  the  dividends 
in  excess  of  4%;  but  where  the  property  of  such  a  corporation 
is  leased  to  another,  the  gross  receipts  tax  is  omitted.     In 
Rhode  Island  street  railways  pay  in  addition  to  the  1%  tax 
hnposed  in  1912,  which  is  deemed  to  be  in  Ueu  of  all  taxes  on 
the  security  holders,  a  so-called  franchise  tax  imposed  in  1909, 
which  consists  of  a  second  tax  of  1%  on  gross  receipts,  as 
well  as  on  net  earnings  over  8%.    Moreover,  street  railways 
in  Rhode  Island  are  also  liable  to  the  general  property  tax, 
and  to  any  other  taxes  that  are  or  may  be  imposed  on  all  per- 
sons or  corporations.     At  present  this  means  an  additional 
tax  on  tangible  property.    In  three  states  the  gross  receipts  tax 
is  graded.     In  Maine  the  rate  is  graded  from  1  to  4%.    In 
Massachusetts  the  rate  of  the  so-called  commutation  tax  on 
street  and  electric  railroads  varies  from  1  to  3%.    This  tax  is 
supplemental  to  the  general  corporation  tax  and  also  to  the 
so-called  additional  corporate  franchise  tax  which  takes  for 
the  state  any  excess  of  dividends  over  8%  on  the  capital  stock 
in  the  case  of  corporations  that  have  paid  an  average  div- 
idend of  6%  since  their  formation.    In  Texas  interurban  roads 
connecting  cities  of  10,000  inhabitants  or  over  pay  from  J^ 
to  Ji  of  1%  of  gross  receipts,  according  as  the  population  is 
under  or  over  20,000.    In  New  Jersey  the  rate  is  2%  on  receipts 
up  to  $50,000,  and  5%  on  the  excess.    They  are  also  subject  to  a 


THE  TAXATION  OF  CORPORATIONS 


193 


tax  at  the  ''average  rate  of  taxation"  of  the  state,  upon  their 
entire  gross  receipts,  in  lieu  of  the  tax  formerly  levied  on  their 
personal  property.  In  almost  all  the  above  cases  the  tax  applies 
to  interurban  as  well  as  city  or  town  street  railways.  The 
street  railway  tax  is  generally  reserved  for  state  purposes, 
but  in  some  cases  it  is  handed  over  in  part  or  whole  to  the 
localities.  In  New  York,  e.  g.,  the  tax  is  imposed  on  such 
proportion  of  gross  receipts  as  the  mileage  on  the  highways  bears 
to  the  total  mileage,  and  is  distributed  in  the  local  districts  in 
proportion  to  the  value  of  taxable  property  of  the  street  railways 
therein.  In  Wisconsin  the  gross  receipts  tax  on  street  railways 
was  replaced  by  the  ad  valorem  system  in  1905. 

Another  class  of  public-service  corporations  is  composed 
of  gas  or  electric  light,  heat  or  power  companies.  We  find  them 
specifically  mentioned  in  fourteen  states.  The  usual  tax  again 
is  on  gross  receipts.  The  rates  are  as  follows:  2  mills,  together 
with  local  licenses,  in  Alabama;  3  mills  in  South  Carolina  (light 
and  power  companies);  3^  to  i^  of  1%  in  Texas  (gas,  electric 
light,  power  and  water  companies) ;  J/^  of  1%  in  Maryland,  New 
Jersey  and  Oklahoma;  25/32  of  1%,  together  with  the  property 
tax,  in  Virginia;  1%  in  North  Dakota,  Rhode  Island  (gas,  elec- 
tric and  power  companies)  and  West  Virginia;  1.2%  in  Ohio 
(gas,  electric  and  natural  gas  companies) ;  li^%  in  Connecticut; 
2}^%  in  Georgia;  and  7}4%  in  California  (transmission  or  sale 
of  gas  or  electricity).  In  Delaware  the  tax  is  2/5  of  1%  of  gross 
earnings  plus  4%  on  dividends  over  4%.  In  New  Jersey  they 
are  subject  to  the  same  additional  tax  on  gross  receipts  as  that 
mentioned  in  the  preceding  paragraph  as  applicable  to  street 
railway  companies.  In  New  York  the  tax,  which  applies  to  gas, 
electric  or  steam  heating,  lighting  and  power  companies  and 
water  works  companies,  amounts  to  J^  of  1%  on  gross  earnings 
together  with  a  tax  of  3%  on  dividends  in  excess  of  4%.  Such 
companies  are  then  exempt  from  the  general  corporation  tax.  In 
Pennsylvania,  on  the  other  hand,  similar  companies  are  subject 
to  the  general  corporation  tax.  Finally  in  some  of  the  Southern 
states  gas  and  electric  companies  are  subject  to  privilege  or 
license  taxes.  In  Florida  this  is  graded  from  $10  to  $250,  with 
50%  additional  for  the  use  of  meters.  In  Mississippi  it  is  graded 
from  $50  to  $500,  and  in  Tennessee  from  $50  to  $700  according 
to  population.  In  Alabama  gas  and  electric  light  and  power  and 
water  works  companies  are  subject  to  local  licenses  of  from  $5 
to  $100  per  city  or  town  according  to  population. 


inl 

II'' 


194 


ESSAYS  IN  TAXATION 


liM 


t'i 


There  still  remain  a  few  classes  of  public-service  corporations 
in  which  we  find  an  occasional  example  of  specific  taxation. 
Among  them  may  be  mentioned  the  following : 

Water  companies  are  taxed  separately  in  Connecticut  (l3/^%  on 
gross  receipts) ;  California  (1  2/10%  on  the  franchise  valuation) ; 
Florida  (state  licenses  of  from  $50  to  $150  and  local  licenses  of 
from  $25  to  $50  according  to  population);  Ohio  (1.2%  on  gross 
receipts) ;  Oklahoma  (%  of  1%  on  gross  receipts) ;  North  Dakota 
(3%  on  net  income);  New  York  (}4  oi  I7c  on  gross  receipts 
together  with  3%  on  dividends  over  4%) ;  Rhode  Island  (1%  on 
gross  receipts  in  addition  to  the  property  tax) ;  South  Carolina 
(3  mills  on  gross  income  in  addition  to  the  property  tax); 
Tennessee  (license  tax)  and  Virginia  (2  5/32  of  1%  on  gross  re- 
ceipts in  addition  to  other  taxes). 

Oil  pipe  linesy  or  as  they  are  sometimes  called  simply  pipe 
lines,  are  taxed  separately  in  California  (1.2%  on  franchise 
valuation);  Delaware  (3/5  of  1%  on  gross  earnings);  Kentucky 
(1%  on  the  value  of  the  oil) ;  Maryland  (2%  on  gross  receipts) ; 
New  Jersey  (2  to  5%  on  gross  receipts) ;  New  York  (3^  of  1%  on 
gross  receipts  together  with  3%  on  dividends  over  4%) ;  North 
Dakota  (3%  on  net  income) ;  Oklahoma  (2%  on  gross  receipts) ; 
Ohio  (4%  on  gross  receipts);  and  Texas  (2%  on  gross  receipts). 

Navigation  companies  are  taxed  in  Florida  (3  cents  per  net  ton 
of  registered  tonnage) ;  Indiana  (3  cents  per  ton) ;  IVIichigan  (river 
improvement  companies,  1%  on  paid  up  capital);  IXIinnesota  (3 
cents  per  ton) ;  New  York  (i.^  of  1%  on  gross  receipts  and  3%  on 
dividends  over  4%);  South  Carolina  (3  mills  on  gross  income). 

Steamboat  companies  are  occasionally  taxed  separately,  as  in 
New  York  (J^  of  1%  on  gross  receipts  in  addition  to  the  general 
corporation  tax) ;  Rhode  Island  (1%  on  gross  receipts  in  addition 
to  the  property  tax);  and  Virginia  (13/10%  on  gross  receipts 
in  addition  to  the  property  tax. 

Terminal  comimnies  or  union  depot  companies  are  taxed 
separately  in  Ohio  (1.2%  of  gross  receipts);  Tennessee  (license 
tax)  and  Texas  (1%  of  gross  receipts). 

Heating  and  cooling  companies  are  taxed  in  New  York  (3/^  of 
1%  of  gross  earnings);  and  Ohio  (1.2%  of  gross  earnings). 

Messenger  or  messenger  and  signal  companies  are  taxed  sep- 
arately in  New  Jersey  (2%  of  gross  receipts) ;  and  Ohio  (1.2%  of 
gross  receipts). 

Road  companies  are  specifically  mentioned  in  Michigan  and 

taxed  23^%  on  gross  earnings. 


THE  TAXATION  OF  CORPORATIONS 


195 


Foreign  bridge  companies  are  taxed  in  Indiana  on  earnings, 
but  the  earnings  are  treated  as  personal  property  and  put  into 
the  regular  tax  list. 

Toll  bridges  and  ferries  are  taxed  in  California  1.2%  on  their 
franchise  valuation,  and  together  with  canal  ditches,  tramroads 
and  poleroads  used  for  transporting  timber  or  other  valuable 
articles  of  commerce  are  taxed  in  Alabama  on  their  gross  re- 
ceipts at  the  general  property  tax  rate. 

Cable  companies  are  taxed  in  Delaware  1%  on  their  gross  re- 
ceipts. 

Finally  all  public  utilities  are  taxed  1%  on  their  net  income  in 
Montana,  and  pay  a  license  tax  on  their  capital  stock  in  West 
Virginia;  while  in  New  Jersey  all  corporations  using  or  occupy- 
ing the  public  streets  or  highways  are  subject  to  the  tax  on  gross 
receipts  which  is  at  the  rate  of  2%  on  receipts  of  $50,000  or 
less  and  5%  on  all  amounts  in  excess  of  $50,000;  and  in  Tennes- 
see all  public  utilities  are  subject  to  the  inspection  and  supervi- 
sion fee  ranging  from  $50  to  $5,000  according  to  gross  receipts. 

Outside  of  the  public-service  corporations  mentioned  above 
we  also  find  a  special  tax  on  building  and  loan  associations  in 
Alabama  (1  per  mill  on  the  capital  stock  up  to  $100,000  and  }/2 
of  1  per  mill  on  sums  above  that  figure) ;  Kentucky  (2%  on  gross 
receipts  of  foreign  companies);  Maine  "capital  dues"  of  34  of 
1%);  and  Vermont  (building  investment  companies,  1%  on 
sums  loaned). 

This  completes  the  list  of  the  special  taxes  levied  on  particular 
classes  of  corporations.  We  thus  come  to  the  third  movement, 
away  from  the  property  tax  which,  as  noted  above,  has  been 
the  introduction  of  a  tax  applicable  to  all  corporations  in  gen- 
eral.   In  other  words,  we  have  now  to  deal  with 

5.  The  General  Corporation  Tax 

Here  again  Pennsylvania  took  the  lead,  for  in  that  state  the 
tax  is  far  older  than  might  be  imagmed  from  its  recent  intro- 
duction into  other  commonwealths.  We  have  already  seen 
that  in  1824  Pennsylvania  imposed  a  tax  on  the  net  dividends 
of  banks.  In  1836  the  tax  was  extended  to  iron  companies, 
at  the  rate  of  eight  per  cent  on  all  dividends  exceeding  six  per 
cent.  In  this  provision  can  be  found  the  germ  of  the  later  laws. 
The  first  general  corporation  tax,  imposed  in  1840,  provided 


m 


^ 


196 


ESSAYS  IN  TAXATION 


that  "banks  and  all  corporations  whatever"  which  declared  a 
dividend  of  one  per  cent  should  pay  "in  addition  to  all  present 
taxes"  one-half  mill  for  each  dollar  of  the  dividend  or  profit, 
and  an  additional  one-half  mill  for  every  additional  one  per 
cent  of  dividend.    In  1844,  however,  an  act  was  passed  which 
sketched  in  broad  outUne  the  path  of  future  development. 
According  to  this  law  all  domestic  corporations  which  made 
or  declared  a  dividend  or  profit  of  at  least  six  per  cent  paid 
a  tax  on  capital  stock  of  one-half  mill  for  each  one  per  cent  of 
dividend-  but  if  the  dividend  was  less  than  six  per  cent,  the 
tax  was  three  mills  on  the  dollar.    This  law  continued  until 
the  act  of  1859  provided  that  the  three  mills  tax  should  be  paid 
only  if  no  dividend  was  declared;  but  that  in  case  of  any  divi- 
dend (not,  as  before,  a  six  per  cent  dividend)  the  tax  should  be 
one-half  mill  on  the  capital  stock  for  each  one  per  cent  of  divi- 
dend.   In  1864  it  was  provided  that  corporations  not  paying 
to  the  state  a  tax  upon  dividends  should  pay  three  per  cent  on 
net  earnings.    The  consoUdated  act  of  1868  excepted  from  the 
general  corporation  tax  only  banks,  savings  institutions  and 
foreign  insurance  companies   (all  of  which  were  separately 
taxed),  but  imposed  a  tax  of  three  per  cent  on  the  net  earmngs 
or  income  of  all  corporations,  except  those  Uable  to  the  ton- 
nage tax,  i,e.  the  transportation  companies. 

The  important  feature  of  this  law,  however,  was  that  the 
capital  stock  tax  was  now  made  applicable  to  all  companies 
incorporated  or  doing  business  in  the  state,  i.e.  to  foreign  as 
well  as  to  domestic  corporations.  Only  from  1868,  therefore, 
was  the  Pennsylvania  tax  a  general  corporation  tax.  The 
general  law  of  1874  made  no  change  except  in  respect  to  trans- 
portation companies  as  mentioned  above,  and  with  the  further 
exception  that  coal  companies  were  to  pay  a  franchise  tax  of 
three  cents  per  ton  transported.  In  1879  the  Ime  of  division 
in  the  tax  was  again  drawn  at  dividends  of  six  per  cent— that 
is,  the  principle  of  the  law  of  1859  was  abandoned  and  that  of 
1844  reinstated.  Limited  partnerships,  except  those  organized 
for  manufacturing  or  mercantile  purposes,  were  put  on  the 
same  footing  as  corporations;  and  the  tonnage  tax  on  coal 
companies  was  limited  to  1881,  after  which  it  was  to  cease. 
Manufacturing  corporations  with  certain  exceptions  were 
exempted  from  taxation  for  state  purposes,  and  a  loan  tax  of 
four  per  cent  was  imposed,  applicable  also  to  the  bonds  of 
corporations.     In  1885  the  latter  was  reduced  to  three  per 


THE  TAXATION  OF  CORPORATIONS 


197 


cent.  In  1889  the  rate  of  the  capital  stock  tax  was  fixed  at  one- 
half  mill  for  each  one  per  cent  of  dividend,  if  dividends  amounted 
to  six  per  cent,  and  at  three  mills  when  dividends  were  less 
than  six  per  cent.  Finally,  in  1891  this  plan  was  abandoned 
and  the  amendments  adopted  which,  as  still  further  altered  in 
1893,  are  now  in  force. 

Under  the  law  as  it  now  stands  in  Pennsylvania,  the  "tax  on 
corporation  stock"  appUes  to  all  corporations,  joint-stock 
associations  and  limited  partnerships  doing  business  in  th 
state  or  having  any  portion  of  their  capital  invested  therein, 
except  banks  and  savings  institutions,  foreign  insurance  com- 
panies, building  and  loan  associations  and  manufacturing  com- 
panies to  the  extent  of  the  capital  stock  invested  in,  and  actually 
and  exclusively  employed  in  carrying  on  manufacturing  within, 
the  state.  Corporations  engaged  in  the  brewing  or  distilling 
of  malt  or  spirituous  liquors,  and  such  as  enjoy  and  exercise 
the  right  of  eminent  domain,  are  not  included  in  this  exception. 
Bourse  companies  are  exempt  as  to  a  certain  proportion  of 
their  capital  stock.  Banks  and  insurance  companies,  how- 
ever, are,  as  we  know,  taxed  separately,  while  building  and  loan 
associations  pay  on  their  matured  stock  a  tax  equal  to  the 
state  tax  on  moneys  at  interest,  and  distilling  companies  pay 
a  separate  tax  on  capital  stock  at  the  rate  of  one  per  cent. 
The  rate  of  the  general  capital  stock  tax  is  now  uniform — 
namely,  five  mills  on  each  dollar  of  the  actual  value  of  the  whole 
capital  stock  of  all  kinds.  This  value,  ascertained  by  appraise- 
ment, must  not  be  less  than  the  average  price  for  which  the 
stock  has  been  sold  during  the  year,  nor  less  than  the  value 
indicated  by  the  net  earnings  or  by  the  profit  in  dividends  or 
by  what  has  been  carried  to  the  surplus  or  sinking  fund.  If 
any  profit  has  been  added  to  the  sinking  fund,  it  is  treated  as 
if  it  had  been  devoted  to  dividends,  unless  it  is  set  apart  ex- 
pressly for  the  payment  of  debts.  In  the  case  of  fire  and 
marine  insurance  companies  the  rate  is  three  mills  on  each 
dollar  of  capital  stock. 

In  addition  to  this  tax  on  corporation  stock,  there  is  a  tax 
of  three  per  cent  on  the  net  earnings  of  unincorporated  banks 
and  all  corporations  except  those  liable  to  the  previous  tax 
or  to  the  tax  on  gross  receipts.  The  only  corporations  which 
would  be  liable  under  this  provision  are  banks  and  manufac- 
turing corporations;  but  the  latter,  with  the  exceptions  just 
noted  as  liable  to  the  tax  on  corporation  stock,  are  now  ex- 


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m 


198 


ESSAYS  IN   TAXATION 


THE  TAXATION  OF  CORPORATIONS 


199 


l)>Ui 


11 


pressly  exempt  from  all  taxation;  and  the  former,  by  electmg 
to  pay  ten  mills  on  the  par  value  of  their  capital  stock,  secure 
exemption  from  all  other  taxation  except  on  their  real  estate. 
Thus  the  net  earnings  tax  does  not  apply  to  corporations  at  all. 
It  is  levied  chiefly  on  unincorporated  savings  banks  and  on 
trust  companies  without  capital  stock.  If  the  banks  do  not 
elect  this  ten  mills  tax,  the  market  value  of  the  stock  is  assessed 
to  the  stockholders  and  taxed  four  mills,  and  the  banks  are 
further  subject  to  local  taxation.  It  has  already  been  noted 
above  in  the  proper  connection  that  transportation,  trans- 
mission, electric  Hght  and  insurance  companies  pay  a  tax  on 
gross  receipts  or  premiums  in  addition  to  the  general  corpora- 
tion tax.  ... 

In  addition  to  the  tax  on  capital  stock,  Pennsylvama  im- 
poses a  "tax  on  loans,"  which  exacts  four  mills  on  the  dollar 
of  all  interest  paid  on  any  scrip,  bond  or  certificate  of  indebted- 
ness issued  by  any  private  corporation,  and  on  all  public  loans 
(except  those  of  Pennsylvania  and  of  the  United  States).    The 
tax  was  first  imposed  in  1864  in  the  shape  of  a  tax  on  the  loans 
themselves.    In  1868  this  was  altered,  so  far  as  corporate  loans 
are  concerned,  to  a  tax  of  5%  on  the  interest  paid.    In  1873 
the  law  was  modified  and  in  1874  the  tax  was  abolished.    In 
1879,  however,  it  was  restored  in  the  shape  of  a  tax  on  the 
corporation.    But  this  law,  like  its  successor  of  1881,  was  de- 
clared unconstitutional;  and  it  was  not  until  1885  that  the 
tax  was  re-established  at  the  rate  of  three  mills  on  the  dollar, 
changed  in  1891  to  four  mills,  at  which  it  now  stands.    This 
tax  must  not  be  confused  with  the  tax  on  loans  or  mortgages 
in  the  hands  of  corporations,  which  is  a  part  of  the  general 
state  tax  on  personal  property.     For  it  has  been  held  that 
corporations  and  associations  liable  to  the  capital  stock  tax 
shall  not  be  required  to  pay  any  further  tax  on  mortgages, 
bonds  or  other  securities  belonging  to  them,  and  which  con- 
stitute any  part  of  their  assets  included  within  the  appraised 
value  of  their  capital  stock.    But  if  they  hold  these  bonds  in 
a  fiduciary  capacity,  they  are  liable.    On  the  other  hand,  the 
tax  on  the  loans  made  by  corporations,  i.e.  on  corporate  obli- 
gations, has  been  upheld  as  a  proper  exercise  of  the  legislative 
authority  and  as  not  in  conflict  with  any  provision  of  the  fed- 
eral constitution.    It  is  deemed  to  be  in  effect  a  tax  on  the  bond- 
holder, not  on  the  corporation,  although  the  corporation  is 
required  to  advance  the  tax  and  to  deduct  it  from  the  interest. 


The  treasurers  of  corporations,  therefore,  pay  the  tax  on  all 
their  bonds  or  obligations  unless  affirmative  proof  is  offered 
that  the  owners  reside  out  of  the  state,  and  then  deduct  the 
tax  from  the  interest  due.  The  tax  is,  however,  not  payable 
on  bonds  owned  by  non-residents.  If  the  bonds  are  sold  "free 
of  tax,"  that  is,  without  recourse  to  the  bondholder,  the  right 
of  the  state  to  collect  from  the  corporation  is  no  wise  affected. 

Certain  classes  of  loans  have  been  declared  non-taxable, 
either  by  special  enactment  or  by  judicial  construction.  These 
are  as  follows: 

(1)  Obligations  held  in  their  own  right  by  corporations  paying 
the  capital  stock  tax;  for  such  obligations  enter  into  the  value 
of  the  capital  stock  which  is  taxed;  (2)  obligations  held,  or  notes 
discounted  or  negotiated,  by  trust  companies,  national,  state 
and  savings  banks;  (3)  obligations  held  by  non-residents  in  their 
own  right,  and  by  persons  whose  residence  is  unknown;  (4) 
obligations  held  by  institutions  organized  for  purely  charitable 
or  reUgiouS  purposes;  (5)  obligations  of  their  members  held  and 
owned  by  building  and  loan  associations;  (6)  obligations  on 
which  no  interest  has  been  paid  or  earned  during  the  tax  year, 
from  which  the  tax  could  have  been  deducted. 

This  general  corporation  tax,  it  is  important  to  note,  is  in 
lieu  of  all  local  taxation  on  personalty.  In  Pennsylvama,  there- 
fore, corporations  subject  to  the  capital  stock  tax  are,  with  some 
exceptions  noted  below,  locally  taxable  only  on  real  estate; 
while  public-service  corporations,  which  are  subject  to  the 
gross  earnings  tax,  are  not  taxable  locally  even  on  their  real 
estate. 

The  law  of  1885  exempted  manufacturing  corporations 
(with  certain  exceptions)  from  all  taxation  for  state  purposes; 
but  it  was  held  that  only  that  part  of  the  capital  of  a  manu- 
facturing company  which  was  invested  in  the  plant  actually 
necessary  for  the  manufacture  of  its  products  could  be  exempted, 
and  that  the  capital  of  such  companies  invested  in  mines  for 
the  production  of  coal  to  be  used  in  the  process  of  manufac- 
turing, or  any  other  capital  similarly  invested,  was  taxable. 
The  laws  of  1889  and  1891,  however,  provide  for  the  exemption 
of  those  companies  only  which  are  organized  exclusively  for 
manufacturing  purposes,  and  the  law  of  1893  specifically  limits 
the  exemption  to  that  part  of  the  stock  which  is  exclusively 
employed  in  carrying  on  manufacturing  within  the  state. 
If  the  capital  is  invested  in  property  which  it  is  merely  con- 


n 


Hi 


III 

4 


tt 


200 


ESSAYS  IN  TAXATION 


venient  to  use  in  connection  with  manufacturing  operations, 
it  is  not  exempt.^  Manufacturing  companies  are  held  to  be 
limited  to  those  that  produce  material  substances.  Laundry 
companies  and  steam  heat  companies,  e.g.  are  not  considered 
manufacturing  companies.  In  the  case,  however,  of  the  tax  on 
loans,  since,  as  we  have  just  seen,  it  is  held  to  be  not  upon  the 
corporation  but  upon  the  moneys  of  the  bondholder,  manufac- 
turing corporations  are  Uable  equally  with  others. 

In  New  York  the  general  corporation  tax  came  later;  for  not 
until  1880  was  a  law  passed  which  was  based  on  the  Penn- 
sylvania act.    This  act  levied  a  tax  on  the  par  value  of  the 
capital  stock  as  fixed  by  the  state  board,  making  the  rate  1  Vz  mills 
on  the  dollar  if  the  dividends  were  less  than  six  per  cent  or  if  there 
were  no  dividends  at  all,  and  }4  mill  for  each  1%  of  dividends  if 
the  dividends  were  6%  or  more.     The  law  has  been  repeatedly 
amended  in  important  details,  especially  by  the  laws  of  1885, 
1889,  1890,  1896,  1901,  1906  and  1910;  but  the  main  outlines 
remained  unaltered.    Among  the  more  important  recent  changes 
are  the  following:  In  1896  only  that  part  of  the  capital  employed 
within  the  state  was  declared  taxable,  although  the  practice 
had  been  to  that  effect  for  some  time.    In  1901  manufacturing 
companies,  which  had  hitherto  been  exempt  only  when  their 
capital  had  been  exclusively  and  wholly  engaged  in  manufac- 
turing within  the  state  were  declared  exempt  if  40%  of  their 
capital  was  so  invested.    In  1906  several  alterations  were  made. 
The  rates  were  now  further  differentiated  according  to  the 
amount  of  business  and  the  character  of  the  enterprise,  so  that 
they  were  fixed  at  H,  H  or  l}4  per  mill,  respectively,  as  will 
be   explained  below.     The  other  important   change  affected 
foreign  corporations  which  invest  their  capital  in  the  stock  of 
another  corporation  doing  business  in  the  state.    These  foreign 
companies  had  not  been  considered  engaged  in  business  in  the 
state.    In  1906  they  were  made  taxable  by  the  provision  that 
the  capital  of  a  corporation  invested  in  the  stock  of  another 
corporation  should  be  deemed  to  be  assets  located  where  the 
property  represented  by  the  stock  is  located.    This  of  course 
also  changed  the  reverse  rule  according  to  which  a  domestic 
corporation  whose  capital  was  invested  in  the  stock  of  a  foreign 
corporation  had  been  taxable,  but  was  now  exempt. 

The  tax,  known  as  the  corporation  or  franchise  tax  or  the 

1  For  a  discussion  of  these  points  see  Eastman,  The  Law  of  Taxation  in 
Pennsylvania,  1909,  p.  671  et  seq. 


THE  TAXATION  OF  CORPORATIONS 


201 


capital  stock  tax,  applied  to  all  corporations  except  the  follow- 
ing: banks,  trust  companies  and  savings  institutions;  insurance, 
title  guaranty  and  suraty  companies;  elevated  railroads  and  sur- 
face railroads  not  operated  by  steam;  water,  light,  heat  and 
power  companies;  agricultural  and  horticultural  associations; 
and  manufacturing,  minmg  and  laundering  companies,  to  the 
extent  only  of  the  capital  actually  employed  in  manufacturing, 
mining  or  laundering,  provided  that  at  least  40%  of  the  capital 
was  invested  in  the  state  and  used  by  them  in  manufacturing, 
mining  or  laundering.  All  of  these  exempt  corporations,  how- 
ever, except  the  two  last  categories  (agricultural  and  manufac- 
turing) were  reached  by  separate  specific  taxes,  as  we  have 
learned  above. 

The  tax  is  assessed  according  to  the  capital  stock.  Originally 
the  rate  was  just  one-half  of  that  of  the  original  Pennsylvania 
prototype.  At  present,  however,  the  rate  of  tax  is  determined 
according  to  very  complicated  rules.  In  reality  there  are  in 
New  York  no  less  than  six  different  classes,  although  the  rather 
confused  law  does  not  clearly  differentiate  them.  They  are  as 
follows: 

1.  Corporations  paying  dividends  of  six  per  cent  or  more 
are  subject  to  a  tax  of  34  of  a  mill  for  each  1%  of  dividends, 
the  tax  to  be  computed  on  the  par  value  of  the  capital  stock. 
This  it  will  be  observed  is  equivalent  to  an  income  tax  of  2J^%. 

2.  If  the  corporation  pays  no  dividends,  the  rate  is  54  of  a 
mill,  the  tax  being  computed  on  the  appraised  value  of  the  is- 
sued capital  stock  employed  within  the  state.^  The  measure  of 
the  amount  of  capital  stock  employed  within  the  state  is  de- 
clared to  be  such  a  portion  of  the  issued  capital  stock  as  the 
gross  assets  employed  in  any  business  within  the  state  bear  to 
the  gross  assets  wherever  employed  in  business.  For  purposes 
of  taxation  the  capital  of  a  corporation  invested  in  the  stock  of 
another  corporation  is  deemed  to  be  assets  located  where  the 
physical  property  represented  by  such  stock  is  located. 

3.  Corporations  paying  less  than  6%  dividends,  whose  lia- 
bilities equal  or  exceed  their  assets  (i.e.  which  are  insolvent), 
or  the  average  selling  price  of  whose  stock  has  been  below  par 
during  the  year,  are  subject  to  a  tax  of  M  of  a  mill,  computed 
on  the  appraised  value  of  the  stock  employed  within  the  state. 

4.  Corporations  paying  less  than  6%  dividends  whose  assets 
exceed  their  Uabilities  by  an  amount  equal  to,  or  greater  than, 

»  See  198  N.  Y.,  246. 


202 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


203 


llih 


their  capital  stock,  or  the  market  price  of  whose  stock  equals 
or  exceeds  par,  pay  13^  mills  on  the  capital  stock  employed 
within  the  state;  and  it  is  further  provided  that  in  this  case 
the  value  of  the  capital  stock  shall  not  be  less  than  par,  or  less 
than  the  difference  l)etween  the  assets  and  the  liabilities,  or 
(if  the  stock  was  sold)  not  less  than  the  average  market  price 
at  which  the  stock  was  sold.  Whichever  of  such  valuations 
is  the  highest  is  to  be  taken  as  the  value  of  the  stock,  on  which 
the  tax  is  computed. 

5.  All  other  corporations,  that  is,  corporations  paying  divi- 
dends of  less  than  Q%  and  whose  assets  exceed  their  liabilities, 
but  not  by  an  amount  equal  to,  or  greater  than,  the  capital 
stock,  and  whose  stock  has  no  market  price,  pay  a  tax  of  not  less 
than  IJ/^  mills  on  the  value  of  the  capital  employed  within  the 
state,  or  1}/^  mills  on  the  average  market  price  of  the  stock. 

6.  Corporations  having  two  or  more  kinds  of  capital  stock 
upon  which  the  rates  of  dividends  vary  pay  a  tax  on  each  kind 
of  stock  according  to  the  respective  class  in  which  they  fall,  as 
explained  in  the  preceding  five  categories. 

Corporations  subject  to  the  capital  stock  tax  are  exempted 
from  all  state  taxation  on  their  personal  property;  but  they 
are  liable  to  local  taxation  on  their  whole  property,  both  real  and 
personal,  according  to  the  primitive  methods. 

In  1917  the  entire  system  of  franchise  taxes  was  changed  by 
making  business  corporations  subject  to  a  tax  of  3%  (increased 
in  1919  to  4}4%)  on  their  income.  The  only  exceptions  were 
holding  and  real  estate  corporations  as  well  as  the  public  utilities 
and  the  financial  companies  subject  to  special  taxes.  In  com- 
pensation for  the  income  tax  business  corporations  were  freed 
from  the  local  tax  on  personal  property  or  on  capital  stock.  The 
result  of  this  new  law  is  that  the  old  corporate  franchise  tax  is 
now  applicable  only  to  public  utilities. 

In  Massachusetts,  the  general  corporation  tax  dates  from 
1864.  In  1863  indeed,  a  law  was  enacted  which  taxed  dividends 
paid  by  corporations  to  non-resident  stockholders;  but  this 
was  pronounced  unconstitutional,  and  was  replaced  by  the 
law  of  the  following  year.  This  was  an  extension  to  corpo- 
rations in  general  of  the  law  of  1832,  which  as  we  remember  ^ 
was  applied  to  manufacturing  corporations  only.  The  tax 
was  levied  on  all  corporations  except  banks  and  mining  com- 

'  Supra,  p.  147. 


panics.  Banks  were  separately  taxed  as  has  been  explained 
above.  Domestic  mining  companies  were  also  separately 
taxed  by  a  law  of  1864  at  7-12  of  1%  on  the  value  of  the  cap- 
ital stock;  and  in  the  following  year  foreign  companies  were 
taxed  at  the  rate  of  1-20  of  1%  (reduced  in  1883  to  1-40  of  1%). 
In  1879  corporations  engaged  in  building  railroads  and  tele- 
graphs in  foreign  countries  were  also  excepted,  but  were  then 
taxed  by  a  special  law  at  the  rate  of  1-20  of  1%  on  the  par  value 
of  the  capital  stock,  together  with  4%  on  dividends.  The  gen- 
eral law  applied  only  to  domestic  companies,  and  this  has  con- 
tinued to  be  the  case  with  a  few  exceptions.  In  1865  foreign 
telegraph  companies  were  included;  in  1885,  foreign  telephone 
companies;  in  1898  foreign  street  railways;  and  in  1906  foreign 
railroads. 

The  act  of  1864  laid  down  the  general  principle  which  is 
still  followed  to-day.  The  basis  of  the  tax  was  the  market 
value  of  the  capital  stock  after  deducting  the  value  of  the  real 
estate  and  machineiy,  if  any,  which  were  locally  taxable. 
The  tax  commissioner,  on  the  basis  of  returns  made  by  the 
corporations,  was  to  estimate  the  fair  cash  value  of  the  shares 
constituting  the  capital  stock.  This  was  to  be  regarded  as  the 
true  value  of  the  corporate  franchise.  The  excess  of  this  value 
over  that  of  the  corporate  property  locally  taxed  was  termed 
the  corporate  excess,  and  on  this  excess  the  tax  was  assessed. 
In  1864  the  rate  was  1.6% — the  average  rate  of  the  general 
property  tax  at  that  time.  In  1865  the  rate  was  made  to  fluc- 
tuate with  the  average  rate  on  property  in  general  from  year 
to  year.  The  tax  was  paid  to  the  state  treasurer,  and  was  by 
him  distributed  to  the  localities  in  accordance  with  the  resi- 
dence of  the  shareholders,  to  be  offset  against  the  sums  due  to 
the  state  from  the  localities  for  the  property  tax  and  the 
bank  tax.  The  state,  however,  retained  the  amount  of  the 
tax  corresponding  to  the  value  of  the  shares  held  by  non- 
residents. 

Thus  remained  the  system  without  any  changes  of  impor- 
tance for  over  three  decades,  with  two  exceptions.  In  1865  a 
law  was  passed  providing  that  in  the  case  of  railroads  and  tele- 
graph companies  only  that  proportion  of  the  capital  stock  should 
be  taken  that  corresponded  to  the  Massachusetts  proportion  of 
the  total  mileage.  In  1885  the  law  was  extended  to  foreign 
telephone  companies,  but  with  the  criterion  of  the  number  of 
instruments  used.    Toward  the  end  of  the  century,  however, 


1^   I' 


\ 


ESSAYS  IN   TAXATION 


the  growiiis  importance  of  the  street  and  electric  railways 
brought  about  a  demand  for  a  heavier  tax,  and  for  an  increased 
revenue  to  the  localities.  Both  of  these  objects  were  accom- 
plished in  1898.  The  distribution  of  the  corporate  excess  to 
the  localities  was  changed  from  the  basis  of  the  residence  of 
the  stockholder  to  that  of  the  location  of  the  line.  Furthermore 
an  additional  franchise  tax  was  imposed  on  street  railways, 
amounting  to  the  entire  excess  of  dividends  over  8%,  provided 
the  corporation  had  paid  an  average  dividend  of  6%  since  its 
formation.  In  1906  electric  roads,  constructed  partly  on  private 
property,  partly  on  public  highways,  were  made  taxable  like 
street  railways,  with  the  exception  that  only  so  much  of  the 
proceeds  as  corresponded  to  the  length  of  track  on  public  high- 
ways was  to  be  distributed  to  the  localities,  the  remainder  being 
distributed  like  the  ordinary  tax  on  corporate  excess. 

A  few  years  later  there  developed  considerable  dissatisfaction 
with  the  taxation  of  domestic  business  corporations,  as  distin- 
guished from  the  public-service  and  the  financial  corporations. 
Domestic  business  corporations  were  taxed  more  severely  than 
their  foreign  competitors,  that  is,  foreign  corporations  doing 
business  in  the  state,  as  well  as  similar  corporations  in  the 
neighboring  states.    As  to  the  latter  we  have  learned  that  in 
New  York  and  Pennsylvania  manufacturing  corporations  were 
in  large  measure  exempt;  and  in  the  other  New  England  states 
there  was  no  effective  tax  at  all  on  such  corporations.    As  to 
foreign  corporations  doing  busmess  in  Massachusetts,  these 
were  liable  only  for  th?ir  tangible  property,  taxed  locally.    The 
shares  were  indeed  taxable  to  the  shareholder  if  discovered;  but 
this  was  an  eventuality  that  almost  never  happened.     This 
discrimination  against  domestic  companies  was  removed  by 
the  law  of  1903.    Henceforth  there  were  to  be  deducted  from 
the  value  of  the  stock  of  ordinary-  busmess  corporations:  (1) 
the  value  of  the  real  estate  and  machinery,  whether  located 
in  or  out  of  the  state;  (2)  all  other  tangible  property  located 
out  of  the  state  and  liable  to  taxation,  whether  taxed  or  not; 
and  (3)  securities  which  were  exempt  in  the  hands  of  a  citizen 
of  Massachusetts  (i.  e.,  stocks  of  state  corporations  and  of  other 
corporations  taxed  in  the  state  on  their  franchises,  mortgages 
or  bonds  exempt  from  taxation).    The  minimum  tax  was  one 
corresponding  to  one-tenth  of  one  per  cent  of  the  market  value 
of  the  stock.    The  maximum  limit  was  reached  by  taking  one 
hundred  and  twenty  per   cent  of  the  valuation  of  the   real 


THE  TAXATION  OF  CORPORATIONS 


205 


estate,  machinery,  tangible  property  and  securities  taxable  to 
residents  of  Massachusetts  and  deducting  the  value  of  all  prop- 
erty liable  to  taxation. 

A  second  change  made  by  another  law  of  the  same  year  was 
the  imposition  on  foreign  corporations  of  a  slight  excise  tax, 
at  the  rate  of  1-100  of  1%  of  the  par  value  of  the  capital  stock, 
with  a  deduction  for  taxes  locally  paid,  and  with  a  maximum 
limit  of  $2,000. 

During  all  these  years  the  rate  of  the  corporate-excess  tax 
had  been  reached  by  dividing  the  taxes  on  property,  exclusive 
of  polls  levied  in  that  year,  into  the  total  valuation  of  property 
in  the  state  for  the  preceding  year.  In  1906  the  rule  was 
changed  for  all  corporations  except  street  and  electric  railways, 
so  that  in  future  the  rate  was  made  the  average  for  three  years. 
In  1909  this  new  rule  was  made  uniform  on  all  corporations, 
without  exception. 

During  the  first  decade  of  the  new  century  another  difficulty 
presented  itself.  The  distribution  of  the  proceeds  had  led  to 
much  dissatisfaction  on  the  part  of  places  where  the  business 
enterprises  were  located;  for  the  revenues  went  not  to  these 
localities,  but  to  the  places  where  the  stockholders  happened  to 
reside.  As  the  result  of  a  long  agitation  the  law  was  changed 
in  1910  so  that  in  the  case  of  ordinary  business  corporations, 
while  the  state  still  retained  that  part  of  the  tax  paid  on  account 
of  the  shares  owned  by  non-residents,  the  remainder  was  dis- 
tributed to  the  city  or  town  where  the  business  was  carried  on ; 
and  if  the  business  was  carried  on  in  more  than  one  city  or  town, 
the  remainder  was  then  distributed  in  proportion  to  the  value 
of  the  tangible  property  of  the  corporation  in  each  city  or  town. 
If,  however,  the  business  was  not  carried  on  in  the  state  and  if 
the  corporation  did  not  own  any  tangible  property  in  the  state 
other  than  ordinary  office  furniture,  the  tax  was  retained  by  the 
state. 

The  corporate  excess  tax  on  business  corporations  was  again 
altered  in  1919,  being  applied  now  to  foreign  business  corpora- 
tions as  well.  Some  changes  were  made  in  the  items  deducted 
from  the  value  of  the  capital  stock,  and  the  tax  became  a  flat 
tax  of  $5  per  thousand.  Finally  in  addition  to  this  corporate 
excess  tax  all  corporations  were  subjected  to  an  income  tax  of 
two  and  a  half  per  cent,  with  complicated  provisions  as  to 
allocation. 

The  Massachusetts  system  of  taxing  the  corporate  excess 


Hi 


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ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


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Fl 


at  present  may  therefore  may  be  summed  up  as  follows.  Cor- 
porations are  divided  into  four  classes:  ordinary  commercial 
and  manufacturing  companies;  street  railroads;  other  public- 
service  corporations;  and  financial  corporations. 

(1)  Ordinary  business  companies  may  deduct  from  the  ap- 
praised value  of  the  capital  stock:  (a)  the  value  of  the  equity, 
exclusive  of  any  mortgage,  of  the  real  estate  and  machinery 
locally  taxed  within  the  state;  (b)  the  value  of  the  property, 
over  and  above  any  mortgage,  situated  in  another  state  or 
country;  (c)  the  value  of  securities,  the  income  of  which  if 
owned  by  a  natural  person  resident  in  Massachusetts  would  not 
be  taxable;  and  (d)  a  proportionate  share  of  the  accounts  and 
bills  receivable.  The  tax  is  distributed  to  the  localities  in  ac- 
cordance with  the  ratio  of  the  tangible  property  in  the  town  or 
towns  where  the  business  is  carried  on,  except  that  the  state 
retains  that  part  of  the  tax  paid  on  account  of  shares  owned  by 
non-residents. 

(2)  Street  railways  may  deduct  from  the  value  of  the  capital 
stock:  (a)  the  value  of  the  real  estate  and  machinery  taxable 
locally,  and  (b)  the  value  of  so  much  of  the  capital  stock  as  is 
proportional  to  the  line  outside  of  the  state.  The  proceeds 
are  th£n  distributed  to  the  localities  in  accordance  with  relative 
trackage,  the  state  retaining  practically  nothing.  In  the  case 
of  electric  roads  only  so  much  as  corresponds  to  trackage  on 
public  highways  is  so  distributed. 

(3)  Other  public-service  corporations  in  general,  are  allowed 
the  same  deductions  as  street  railways,  but  the  proceeds  are  dis- 
tributed according  to  the  residence  of  the  stockholders.  In 
the  case  of  domestic  telephone  companies,  however,  instead  of 
deducting  so  much  of  the  stock  as  is  proportional  to  mileage 
outside  of  the  state,  the  law  prescribes  a  deduction  of  so  much 
of  the  stock  as  is  owned  by  the  companies  in  other  corpora- 
tions, when  the  tax  is  paid.  In  the  case  of  foreign  telephone 
companies,  in  lieu  of  this  there  is  deducted  so  much  of  the 
capital  stock  as  is  proportionate  to  the  number  of  telephones 
used  or  controlled  outside  of  the  state. 

(4)  Financial  corporations  subject  to  the  law  include  only 
trust  companies  and  stock  insurance  companies.  For  banks, 
savings  banks  and  mutual  insurance  companies  are,  as  we  know, 
taxable  under  different  laws.  Financial  corporations  pay  the 
excise  tax  on  all  personal  property  held  in  trust.  But  as  they  are 
permitted  to  deduct  the  value  of  real  estate  and  as  mortgages 


are  in  Massachusetts  considered  an  interest  in  real  estate,^ 
they  may  deduct  all  their  loans  on  real  estate  and  thus  vir- 
tually escape  taxation  on  this  account.  They  are,  however, 
further  taxable  on  their  deposits  (except  demand  deposits) 
at  a  rate  equal  to  three-quarters  of  the  rate  on  the  corporate 
excess.  This  means  virtually  a  rate  of  about  1%  on  deposits,— 
double  that  on  savings  banks. 

The  Massachusetts  system  is  therefore  a  complicated,  but 
effective  one.^  The  chief  criticism  to  be  urged— namely,  the 
failure  to  take  account  of  corporate  bonds  in  estimating  the 
value  of  the  capital — is  somewhat  attenuated  by  the  fact  that 
in  Massachusetts,  to  a  far  greater  extent  than  anywhere  else, 
railroads  as  well  as  other  corporations  have  been  created  on  the 
proceeds  of  share  capital  alone.  The  other  criticism,  however, 
that  the  tax  applies  only  to  domestic  companies  has  been  re- 
moved by  the  law  of  1919. 

The  corporate-excess  method  of .  taxation  has  recently  been 
extended  to  California,  but  with  improvements.  In  Califor- 
nia the  law  of  1910,  which  as  we  know  ^  was  designed  to  bring 
about  a  separation  of  state  and  local  revenues,  divided  corpora- 
tions into  two  classes — public-service  and  other  corporations. 
All  public-service  corporations  (except  water  companies)  are 
taxed  on  the  basis  of  gross  receipts,  according  to  the  rates 

*  Cf.  supra,  p.  104. 

2  Among  the  more  important  literature  of  the  subject  we  may  mention: 
James  R.  Garrett,  "Taxation  of  Franchises  in  Massachusetts,"  in  Munici- 
pal Affairs,  vol.  iv.,  p.  506;  F.  A.  Wood,  "The  Massachusetts  Franchise 
Tax  and  Local  Distribution,"  ibid.,  p.  124;  J.  P.  Procter,  Additional  Bur- 
dens upon  Street  Railway  Companies,  Boston,  1891;  Whitney  and  Cummings, 
Additional  Burdens  upon  Street  Railway  Companies,  Boston,  1S91;  E.  W. 
Burdett,  Argument  for  the  Massachusetts  Street  Railway  Association,  Boston, 
1893;  S.  J.  Elder,  Special  Taxation  for  the  Use  of  the  Streets,  Boston,  1897; 
F.  A.  North,  Business  Corporations  in  Massachusetts,  Boston,  1903;  H. 
Winn,  The  Corporation  Exemptions  of  1903,  Boston,  1905;  A.  E.  Pillsbury, 
Argument  for  the  Association  of  Massachusetts  Gas  Companies,  Boston,  1903; 
J.  M.  Hallowell,  The  Corporation  Franchise  Tax,  Boston,  1904;  G.  Galkins, 
"The  Massachusetts  Business  Gorporation  Law,"  in  Ripley's  Trusts,  Pools 
and  Corporations,  1907;  J.  M.  Hallowell,  The  Taxation  of  Domestic  Manufac- 
turing Corporations  in  Massachusetts,  1908;  G.  A.  Andrews,  "Taxation  of 
Gorporate  Franchises  in  Massachusetts,"  in  the  Yale  Review,  Feb.,  1911, 
p.  353  et  seq.;  The  New  Massachusetts  Business  Corporation  Excise  Tax. 
Pub.  by  the  First  National  Bank  of  Boston,  1919.  Cf.  the  book  by  Fried- 
man and  the  article  by  Bullock  mentioned  supra  on  pp.  142  and  143.  Much 
material  will  also  be  found  in  the  numerous  official  reports  on  taxation. 

'  Cf.  infra,  chap.  xi. 


208 


ESSAYS  IN   TAXATION 


THE  TAXATION  OF  CORPORATIONS 


209 


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II 


mentioned  in  the  preceding  section,  and  the  taxes  are  expressly 
declared  to  be  taxes  upon  the  property  and  the  franchise.  All 
other  corporations,  including  mercantile,  manufactunng  and 
mining  companies  (except  insurance  companies  and  banks  which 
are  separately  taxed)  pay  a  state  tax  on  the  so-called  fran- 
chise. This  is  however  virtually  a  tax  on  the  corporate  ex- 
cess. For  the  value  of  the  franchise  is  held  to  be  the  aggregate 
value  of  the  stock  and  bonds  less  the  value  of  the  tangible 
property  locally  taxable.     On  this  franchise,  so  determined 

a  rate  of  1%  is  imposed.  •     j     t    +i. 

In  this  new  system  several  points  are  to  be  noticed.    In  the 
first  place,  the  definition  of  the  franchise  includes  all  the  three 
varieties  of  franchises,  which  we  shall  discuss  later.  ^    In  the 
second  place,  a  peculiar  provision  is  inserted  into  the  law, 
requiring  in  the  case  of  ordinary  corporations  the  deduction 
of  the  value  of  the  good  will  in  estimating  the  value  of  the 
franchise.     Thirdly,  bonds  as  well  as  stock  are  considered  in 
ascertaining  the  value  of  the  franchise.    Fourthly,  in  the  case 
of  pubUc-service  corporations  the  tax  on  gross  receipts  is  in 
lieu  of  all  other  taxes  except  the  local  tax  on  real  estate,  the 
state  corporation  Ucense  tax  and  such  municipal  charges  as 
may  be  imposed  for  any  special  privilege  or  franchise.    Fifthly, 
in  the  case  of  other  corporations  in  general  the  only  difference 
theoretically  is  that  the  franchise  is  determined  and  taxed  by 
the  state  instead  of  by  the  locality,  the  remainder  of  the  prop- 
erty still  being  subject  to  local  taxation.    Practically,  however, 
it  means  that  the  tax  is  now  really  assessed,  whereas  formerly 
it  was  apt  to  be  left  in  abeyance.    It  may  also  be  mentioned 
that,  evidently  by  some  oversight,  in  addition  to  the  franchise 
tax  there  is  still  left  in  California  the  old  annual  license  tax  of 
$20  on  all  corporations.  .       ^^ 

In  New  Jersey,  the  tax  on  "miscellaneous  corporations 
dates  from  1884,  and  is  described  as  a  "Ucense  for  the  corporate 
franchise."  As  amended  in  1892,  it  applies  to  all  corporations 
except  railroads  and  canals  (both  of  which  are  taxed  separately), 
banks,  cemeteries,  reUgious,  charitable  or  educational  associa- 
tions, and  manufacturing  or  mining  companies  at  least  fifty 
per  cent  of  whose  outstanding  capital  is  invested  in  business 
in  the  state.  If  the  latter  have  less  than  fifty  per  cent  of  their 
capital  so  invested,  they  pay  the  tax  on  capital  stock  mentioned 

» Cf.  infra,  chap,  vii,  sec.  i. 


below,  but  may  deduct  the  assessed  value  of  the  property  so 
used  in  manufacture  or  mining.  Telegraph,  telephone,  cable, 
express,  parlor  car,  gas,  electric  light,  insurance,  oil  and  pipe- 
line companies,  as  we  have  seen  above,  are  taxed  under  this 
law  in  a  special  manner,  i.e.  on  receipts,  premiums  and  dividends. 
All  other  companies  included  under  the  head  "miscellaneous 
corporations,"  pay  a  yearly  "license  fee"  or  "franchise  tax" 
of  one-tenth  of  one  per  cent  on  the  capital  stock  issued  and 
outstanding  up  to  three  million  dollars;  one-twentieth  of  one 
per  cent  on  the  capital  between  three  and  five  millions;  and 
fifty  dollars  additional  for  each  one  million  dollars  capital  in 
excess  of  five  millions.  This  tax  applies,  except  in  the  case  of 
insurance  companies,  only  to  domestic  corporations.  But  it  is 
to  be  borne  in  mind  that  railroad  companies  are  not  included 
in  this  tax  on  miscellaneous  corporations. 

In  Rhode  Island  corporations  were  not  separately  taxed 
until  1912.  The  new  law  also  makes  a  distinction  between 
pubHc-service  and  other  corporations.  Public-service  corpora- 
tions are  taxed  on  gross  receipts,  as  explained  in  the  previous 
section;  but  the  system  differs  from  that  of  California  in  that 
the  rate  is  low  and  in  that  not  only  real  estate  but  also  the  tan- 
gible personalty  continues  to  be  liable  for  taxation  to  the  general 
property  tax.  The  gross  earnings  tax  therefore  simply  takes 
the  place  of  the  tax  on  intangible  personalty.  Other  corpora- 
tions— i.e.  manufacturing,  mercantile  and  miscellaneous  cor- 
porations, wherever  incorporated — pay  a  tax  at  the  low  rate  of 
4  mills  on  the  dollar  on  the  corporate  excess,  which  is  deter- 
mined as  follows:  The  value  of  all  bonds  and  of  all  other  in- 
debtedness is  added  to  the  value  of  the  stock.  In  the  case  of 
corporations  doing  a  business  outside  of  the  state,  only  a  por- 
tion of  the  value  of  the  stock  is  taken:  where  they  derive  their 
profit  chiefly  from  the  sale  or  use  of  real  estate  or  tangible 
personalty,  the  proportion  taken  is  the  ratio  of  the  value  of 
such  property  in  the  state  to  the  value  of  all  such  property  in 
and  out  of  the  state;  if,  on  the  other  hand,  the  profits  are  de- 
rived chiefly  from  the  holding  or  sale  of  intangible  property, 
the  criterion  is  the  relative  proportion  of  gross  receipts  in  the 
state  to  total  gross  receipts.  In  any  other  case  in  which,  as 
the  law  reads,  "these  proportions  are  not  equitably  appUcable" 
the  officials  are  to  take  "such  proportion  as  is  equitable." 
From  the  total  value  of  stock  and  debts  thus  ascertained  is 
deducted  the  assessed  value  of  the  realty  and  tangible  person- 


:illl 


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aity  located  in  the  state.    The  remainder  is  pronounced  to  be 
the  value  of  the  corporate  excess. 

To  these  six  states  with  general  corporation  taxes— Pennsyl- 
vania, New  York,  Massachusetts,  California,  New  Jersey  and 
Rhode  Island— there  might  be  added  Maryland.    In  Maryland, 
the  "tax  on  incorporated  institutions"  dates  from  1841,  when 
all  domestic  corporations  were  required  to  pay  on  the  stock 
owned  by  non-residents  (and  after  1842  by  residents),  the  state 
projierty  tax.    The  county  tax  was  still  collected  from  the  share- 
holder.   In  1878  the  present  method  was  introduced,  and  the 
office  of  tax  commissioner  created.    The  tax  is  levied  on  the 
capital  stock,  or,  if  there  be  none,  on  the  property  and  assets  of 
all  corporations,  except  steam  railroads  and  savings  institu- 
tions, both  of  which  are  taxed  separately.     Deductions  are 
made  from  this  valuation  for  the  real  property,  for  the  capital 
invested  in  taxable  property,  for  the  non-taxable  securities  held 
and,  in  the  case  of  building  associations,  for  mortgages  on 
taxable  property.    The  corporations  pay  on  only  so  much  of  the 
stock  as  is  owned  by  residents.    They  were  also  required  to  pay, 
under  a  law  of  1847,  a  locally  assessed  tax  on  bonds  owned  by 
residents.    In  1896,  however,  bonds  were  made  taxable  to  the 
owners  at  a  rate  of  3  mills,  in  addition  to  the  general  state  rate. 
The  corporation  taxes  in  Maryland,  therefore,  now  have  only  a 

very  limited  scope. 

An  interesting  recent  development  is  the  adoption  of  corporate 
income  taxes  now  (1921)  found  in  ten  states.  Wisconsin  led 
the  way  in  1911  by  a  2%-6%  tax,  as  a  part  of  the  general  in- 
come tax.  Connecticut  followed  in  1915  with  a  2%  tax  on 
business  corporations.  In  neither  of  these  cases  were  public 
utilities  included.  Virginia  had  for  a  few  years  subsequent  to 
1843  a  tax  on  dividends.  During  the  Civil  War,  again,  a  tax 
was  imposed  on  the  capital  of  steamboat  companies  and  ''com- 
panies of  a  similar  character."  In  1916,  however,  the  old  per- 
sonal income  tax  was  extended  to  corporations  (excepting  pubUc 
utilities)  at  the  rate  of  1%  and  in  1919  the  rate  was  graduated 
from  1  to  2%.  Alabama  had  for  a  short  time  after  1866  a  tax 
on  dividends.  There  was  formerly  also  a  tax  on  the  incomes  of 
corporation;  but  this  was  abolished  in  1884.  In  1919,  however, 
a  general  income  tax  law  was  enacted,  applicable  to  corpora- 
tions as  well  as  individuals,  but  in  1920  the  law  was  declared  un- 
constitutional. The  corporate  income  taxes  first  levied  by  New 
York  in  1917  and  Massachusetts  in  1919  have  been  mentioned 


above.  In  neither  case  were  public  utilities  included;  although 
Massachusetts  has  now  for  three  successive  years  (1919-1921) 
included  public  utilities  by  a  special  law  from  year  to  year.  All 
corporations  were  included  in  the  general  income  tax  by  Mis- 
souri in  1917  at  H  of  1%  (increased  in  1919  to  1}4%)  and  by 
North  Dakota  in  1919  at  3%;  and  in  the  same  year  Montana 
subjected  ail  corporations  to  a  "  license  fee  "of  1%  on  net  income. 
Finally  in  1921,  the  income  tax  of  Mississippi,  levied  on  indi- 
viduals in  1912  at  the  rate  of  }/^  of  1%  was  declared  by  the 
courts  applicable  to  all  corporations;  and  North  Carolina  in 
1921,  imposed  a  tax  of  3%  on  the  net  income  of  all  corpora- 
tions doing  business  in  the  state.  On  the  other  hand  the 
general  income  tax  of  New  Mexico  of  1919  was  repealed  in  1920, 
and  the  special  excise  tax  on  public  utilities  of  West  Virginia  of 
1920  was  abandoned  in  1921. 

In  addition  to  these  fourteen — or  including  Maryland  fifteen 
— states  with  a  general  corporation  tax  on  either  capital  or  in- 
come we  find  many  commonwealths  which  impose  a  slight  tax, 
almost  in  the  nature  of  fees.  In  a  certain  sense  these  may  also 
be  called  general  corporation  taxes.  They  differ,  however, 
from  the  corporation  taxes  hitherto  discussed  in  three  respects. 
In  the  first  place,  they  are  in  almost  every  case  not  substitutes 
for,  but  supplemental  to,  the  general  property  tax.  Secondly, 
with  one  or  two  exceptions,  the  charge  is  fixed  or  graduated  at 
specific  sums  instead  of  being  a  percentage  tax.  In  the  third 
place,  the  amount  is  so  insignificant  as  scarcely  to  warrant  the 
name  of  tax.  In  some  cases  the  charge  is  even  known  as  a  fee, 
although  the  appellations  are  very  varied .•  In  ten  states — 
Alabama,  Arkansas,  California,  Colorado,  Georgia,  Kentucky, 
Oregon,  Utah,  Vermont  and  West  Virginia — it  is  called  a  license 
or  annual  license  tax.  In  ten  states — Delaware,  Kentucky, 
Maine,  Michigan,  Missouri,  North  Carolina,  Ohio,  Texas, 
Virginia  and  Washington — it  is  called  a  franchise  tax.  In 
Nebraska  it  is  called  an  annual  occupation  fee.  In  Oklahoma 
it  is  called  a  ''license  tax  or  license  fee."  In  Kentucky  there 
is  both  a  license  tax  and  a  franchise  tax,  the  former  being  im- 
posed on  all  corporations,  the  latter  being  payable  in  addition 
by  public  utilities.  In  California,  as  we  noted  above,  the  license 
tax  is  payable  in  addition  to  the  new  general  franchise  tax.  In 
most  of  the  above  states  the  license  tax  is  supplemental  to  the 
ordinary  property  tax;  and  in  several  of  these  states,  as  we 
learned  in  the  last  section,  there  are  additional  taxes  on  certain 


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II 


classes  of  corporations.  The  character  and  rate  of  these  license, 
or  so-called  franchise,  taxes  are  as  follows: 

In  Alabama  the  "license  tax,"  imposed  on  all  corporations, 
domestic  and  foreig;n,  as  a  part  of  the  general  privilege  tax 
system,  varies  from  $10  if  the  capital  is  under  $10,000  to  $500 
if  the  capital  is  over  one  million  dollars.  In  Arkansas  the 
''franchise  tax"  is  at  the  rate  of  1-20  of  1%  upon  the  proportion 
of  the  subscribed  or  issued  and  outstanding  capital  stock  em- 
ployed within  the  state.  In  California  the  "license  tax"  is  at 
the  flat  rate  of  $20.  In  Colorado  the  "license  tax"  on  domestic 
corporations  is  2  cents  for  each  $1,000  if  the  capital  is  $25,000 
or  over.  In  the  case  of  foreign  corporations  the  tax  is  imposed 
on  only  so  much  of  the  capital  stock  as  is  employed  within  the 
state.  In  Delaware,  where  as  we  know  public-service  corpora- 
tions as  well  as  insurance  companies  and  banks  are  separately 
taxed,  all  other  corporations,  i.  6.,  all  manufacturing,  mining, 
mercantile  and  miscellaneous  corporations  with  less  than  50% 
of  capital  invested  in  business  carried  on  in  the  state,  or  whose 
capital  is  invested  wholly  without  the  state,  are  subject  to  an 
"annual  franchise  tax"  on  capital  stock,  ranging  from  $5,  where 
the  capital  is  under  $25,000,  to  $50  where  it  is  a  million  dollars, 
with  an  additional  $25  for  every  succeeding  million  dollars. 
In  Georgia  the  "annual  license  tax"  is  graded  from  $5  to  $100. 
In  Kentucky  the  "license  tax"  is  30  cents  on  each  $1,000  of 
capital.  In  Maine  the  "annual  franchise  tax"  is  graded  from 
$5  to  $50  where  the  capital  exceeds  a  million  dollars,  with  $25 
additional  for  each  succeeding  million  dollars.  In  Michigan 
it  is  fixed  at  3  J^  mills  on  each  dollar  of  paid  up  capital  and  sur- 
plus, the  minimum  being  $50,  the  maximum  $10,000.  In 
Missouri  the  rate  in  1917  was  3/40  of  1%,  increased  in  1919  to 
l/lO  of  1%  on  the  par  value  of  the  capital  stock  and  surplus.  In 
Nebraska  the  "occupation  fee"  varies  from  $5  to  $200  if  the 
capital  exceeds  two  millions. 

In  North  Carolina  and  Ohio  the  tax  is  1-10  of  1%  on  the 
capital.  In  Oklahoma  the  "license  tax  or  fee,"  which  does  not 
apply  to  public-service,  insurance,  banking  or  building  and  loan 
associations,  is  in  the  case  of  domestic  corporations  }^  of  1  per 
mill  of  authorized  capital  stock,  and  in  the  case  of  foreign 
corporations  one  per  mill  of  the  capital  stock  employed  in 
business  done  within  the  state.  The  tax,  however,  is  in  no  case 
payable  on  that  part  of  the  capital  employed  in  any  business 
sui)ject  to  the  "production,  income  or  gross  receipts  tax."    In 


)'  I 


THE  TAXATION  OF  CORPORATIONS 


213 


Oregon  the  "license  tax"  is  graded  from  $10  to  $200  where  the 
capital  is  over  two  millions.  South  Carolina  imposes  a  "license 
tax "  of  one-half  per  mill  on  all  corporations  except  those 
public-service  corporations  which  pay  three  mills.  In  Texas 
domestic  companies  pay  50  cents  on  each  $1,000  of  authorized 
capital  stock  up  to  1  million  dollars  and  25  cents  on  each  $1,000 
thereafter.  If  the  amount  of  capital  stock  actually  paid  plus 
surplus  and  undivided  profits  exceeds  the  authorized  capital 
stock,  the  tax  is  to  be  computed  on  the  former.  If  it  does  busi- 
ness without  the  state,  the  tax  is  proportioned  to  gross  receipts. 
Foreign  companies  pay  1  mill  up  to  $1,000;  }/^  mill  to  $100,000 
and  14  niill  to  a  million  dollars  of  the  authorized  capital  stock, 
proportioned  as  in  the  preceding  sentence.  In  Utah  the  "  license 
tax"  on  all  domestic  corporations  (except  those  not  organized 
for  profit,  water  companies  for  culinary  purposes,  canal  and 
irrigation  companies  and  insurance  companies)  and  on  all 
foreign  corporations  is  graded  from  $5  to  $50  when  the  capital 
stock  is  over  $200,000.  Virginia  levies  a  small  "license  tax." 
In  Vermont  the  "license  tax"  is  $10  with  $5  additional  for  every 
succeeding  $50,000  until  the  tax  reaches  $50. 

In  Washington  the  "franchise  tax"  is  fixed  at  $15.  In  West 
Virginia  domestic  companies  pay  a  "license  tax"  graded  from 
$10  to  $150  from  $500,000  to  a  million  dollars;  and  $40  on  each 
million  dollars  additional.  In  the  case  of  non-resident  domestic 
companies  $475  and  10  cents  on  each  additional  $1,000  from 
two  to  four  millions;  over  four  millions,  $675  and  $50  on  each 
additional  $1,000. 

The  most  recent  development  is  in  connection  with  the  grow- 
ing practice  of  issuing  shares  without  par  value.  In  some  cases 
as  in  Missouri  and  New  York  each  such  share  is  deemed  equiva- 
lent for  purposes  of  taxation,  to  $100.  In  other  cases  as  in 
Michigan  its  value  is  determined  by  actual  sale  or  by  book 
value.  In  still  other  cases  the  franchise  tax  is  at  a  flat  rate  as 
in  Maine  (5  mills). 

Outside  of  the  few  commonwealths  which  levy  a  general 
corporation  tax  at  a  special  rate,  almost  all  the  states,  including 
those  mentioned  in  the  preceding  list,  tax  the  property  of  cor- 
porations in  general  precisely  like  that  of  individuals  through 
the  general  property  tax.  Of  recent  years,  however,  some 
states  have  declared  the  franchise  to  be  taxable  property,  to 
be  assessed  like  other  property.  This  is  true  of  corporations 
in  general  in  Illinois,  Indiana,  Kentucky,  Michigan,  Minnesota, 


214 


ESSAYS  IN  TAXATION 


Missouri,  Montana,  Tennessee  and  Wyoming,  which  states 
are  to  be  added  to  those  mentioned  above,  where  the  license 
or  other  tax  is  called  a  payment  for  the  franchise.  Sometimes 
the  corporate  excess  is  specifically  designated  as  property  and 
is  declaivd  to  be  the  excess  of  the  value  of  the  capital  stock 
over  that  of  the  tangible  realty  and  personalty.  The  corporate 
excess  is  specified  in  Alabama,  Illinois,  Indiana,  Minnesota, 
Mississippi,  Nebraska,  North  Carolina,  North  Dakota,  South 
Dakota,  Tennessee  and  Texas.  In  most  of  these  cases,  however, 
the  corporate  excess  is  taxable  by  the  local  assessors,  which 
means  in  practice  that  it  is  generally  not  reached.  In  only  a 
few  of  these  cases,  like  Illinois,  is  the  corporate  excess  appraised 
by  a  state  board,  and  in  that  state  the  system  does  not  apply 
to  railroads,  telegraph,  telephone,  banking  and  insurance  com- 
panies which  are  separately  reached,  nor  to  companies  for 
purely  manufacturing  purposes,  for  the  mining  or  sale  of  coal, 
for  printing,  for  publication  of  newspapers,  or  for  the  improving 
or  breeding  of  stock.  As  we  mentioned  above,^  this  attempt 
to  include  the  franchise  in  the  value  of  the  property  really  in- 
volves a  partial  departure  from  the  general  property  tax.  It 
will  be  more  fully  discussed  below. 

We  see  then  that  only  in  Massachusetts,  Pennsylvania,  New 
York,  California  and  Rhode  Island  are  there  general  corporation 
taxes,  in  the  real  sense  of  the  term.    To  these  states  must  now 
(1921)  be  added  Connecticut,  Mississippi,  Missouri,  Montana, 
North  Carolina,  North  Dakota,  Virginia  and  Wisconsin,  l)e- 
cause  of  their  corporate  income  taxes,  although  the  first  and 
last  do  not  include  public  utilities,  and  the  others  use  the  income 
tax  only  as  a  minor  supplement  to  the  property  taxes.     In 
Mar>'land  the  corporation  tax  is  in  reality  levied  almost  exclu- 
sively on  domestic  companies.    In  New  Jersey,  the  law  applies 
in  terms  only  to  domestic  corporations.    Maryland  and  Penn- 
sylvania are  the  only  states  which  levy  taxes  on  corporate  bonds, 
although  virtually  only  on  the  bonds  of  domestic  corporations 
in  the  hands  of  residents.     In  California  and  Rhode  Island, 
however,  bonds  are  considered  in  arriving  at  the  value  of  the 
franchise  or  of  the  corporate  excess.    Finally,  only  in  Pennsyl- 
vania is  the  corporation  tax  in  lieu  of  the  local  tax  on  personalty, 
while  in  California  and  Connecticut  as  well  as  in  Pennsylvania 
the  state  tax  on  public-service  corporations  carries  with  it 
exemption  from  all  local  taxation. 

» Supra,  pp.  150  and  180. 


THE  TAXATION  OF  CORPORATIONS 
6.  The  Tax  on  Corporate  Charters 


215 


A  mistake  often  made  is  that  of  confounding  with  the  cor- 
poration tax  what  may  l)e  called  the  tax  on  corporate  charters. 
This  is  in  reality  a  license  fee  charged  for  the  privilege  of  in- 
corporation or  of  increasing  the  capital  stock  of  a  company, 
and  it  is  generally  either  a  lump  sum,  or  a  percentage  of  the 
amount  of  the  capital  stock.  It  is  in  most  cases  of  very  recent 
origin.  In  only  a  few  states  does  it  antedate  the  last  decade 
of  the  nineteenth  century  and  in  only  one  or  two  is  it  found 
before  1870. 

In  Pennsylvania  the  earliest  act  is  that  of  1849,  which  pro- 
vided that  certain  manufacturing  companies  on  their  incorpora- 
tion should  pay  a  bonus  of  3^  of  1%  on  the  capital  stock,  pay- 
able in  five  annual  instalments.  In  1868  the  rate  was  changed  to 
}4  of  1%  but  the  tax  bonus  was  extended  to  all  corporations 
with  a  few  exceptions,  among  which  railroads  were  the  most 
important.  In  1889  the  same  rate  was  imposed  on  the  author- 
ized amount  of  all  increases  of  capital  stock.  In  1897  the  rate 
was  increased  to  1/3  of  1%  on  the  authorized  capital  stock, 
with  some  exceptions  which  were  still  taxable  at  the  old  rate. 
In  1899  the  rate  was  made  uniform  on  all  corporations  at  1/3 
of  1%,  and  the  only  corporations  excepted  from  the  bonus 
were  building  and  loan  associations  and  so-called  corporations 
of  the  first  class,  i.  e.,  those  incorporated  by  the  courts,  and 
usually  not  for  profit.  Railroads  were  therefore  first  included 
in  this  year.  In  1901  the  bonus  was  extended  to  foreign  cor- 
porations also  and  was  applied  to  so  much  of  the  capital  as 
might  be  invested  in  the  state  after  the  date  of  the  passage  of 
the  act. 

In  Massachusetts,  where  the  charge  is  called  an  incorpora- 
tion fee,  the  first  law — that  of  1863 — simply  imposed  a  fee  of  SI 
for  recording  the  certificate  of  incorporation.  In  1865  this 
was  increased  to  $5.  In  1870  the  charge  was  made  a  percentage 
one  and  the  rate  was  fixed  at  1-20  of  1%  of  the  capital  stock. 
In  1871  the  minimum  charge  was  fixed  at  $5  and  the  maximum 
at  $200.  This  continued  to  be  the  law  until  1903  when  the 
charges  were  reduced,  the  rate  being  fixed  at  1-40  of  1%,  but 
with  a  minimum  payment  of  §10. 

At  present  the  tax  on  corporate  charters  is  found  in  almost 
all  of  the  states,  although  under  widely  varying  names.  In 
Alabama  and  in  Illinois,  it  is  called  ''  licence  fees,"  in  Connecti- 


216 


ESSAYS  IN  TAXATION 


cut,  it  applies  only  to  foreign  corporations  seeking  a  charter 
in  the  state,  and  is  termed  the  "tax  on  corporate  franchise," 
although  quite  unlike  the  franchise  taxes  in  other  common- 
wealths; in  Kentucky,  it  is  called  the  "tax  on  organization"; 
in  Maine,  the  "tax  on  new  corporations";  in  Maryland,  "bonus 
on  corporations" ;  in  Michigan  the  organization  tax;  in  Missouri, 
the  "  corporation  tax " ;  in  Nebraska  "occupation  fee  on  corpora- 
tions"; in  New  Hampshire,  "charter  fees";  in  New  Jersey,  the 
"tax  on  certificates  of  incorporation";  in  New  York,  the  "or- 
ganization of  corporations  tax";  in  North  Dakota  the  "cor- 
porate excise";  in  Ohio,  "organization  fee";  in  Oklahoma 
"incorporating  fee";  in  Pennsylvania  and  Rhode  Island, 
"bonus  on  charters";  in  Texas,  "filing  fees";  in  Vermont, 
"corporation  license  tax";  in  West  Virginia,  "license  tax  on 
charters  and  certificates  of  corporations." 

The  rates  are  flat  rates;  fixed  percentage  rates;  graded  rates, 
fixed  in  each  grade;  graded  percentage  rates;  and  graded  rates, 
partly  fixed  and  partly  percentage. 

The  flat  rates  are  found  in  seven  states:  $4  in  West  Virginia; 
$5  in  Arizona  and  Oklahoma;  SIO  in  South  Dakota  and  Washing- 
ton; $25  in  Arkansas;  and  $100  in  Florida. 

The  percentage  rates  are  found  in  fourteen  states  as  follows: 
2  cents  per  $1,000  in  Colorado  and  Tennessee;  15  cents  per 
$1,000  in  Nevada;  20  cents  per  $1,000  in  New  Jersey  (with 
minor  variations  in  detail);  25  cents  per  $1,000  in  Utah;  1-20 
of  1%  (or  50  cents  per  $1,000)  in  Massachusetts,  Michigan, 
New  York  (for  domestic  companies)  and  North  Dakota;  3-20  of 
1%  in  Ohio;  1-10  of  1%  in  Indiana,  Kentucky  and  Rhode 
Island;  1/8  of  1%  in  Maryland  and  New  York  (foreign  com- 
panies); 1/3  of  1%  in  Pennsylvania. 

The  graded  rates,  fixed  in  each  class,  are  found  in  seven  states: 
Alabama  ($25  when  the  capital  is  not  over  $50,000,  to  $250 
when  the  capital  is  over  a  million  dollars) ;  Georgia  ($5  to  $100) ; 
Idaho  ($5  when  the  capital  is  not  over  $25,000  to  $25  when  the 
capital  is  over  $500,000) ;  Oregon  ($10  to  $100  when  the  capital 
is  over  two  million  dollars);  Texas  ($50  [except  railroads, 
telegraph  lines,  street  railways,  express  companies  and  channel 
or  dock  companies,  which  start  at  $200]  to  $2,500) ;  Virginia  ($25 
to  $5,000  when  the  capital  is  over  ninety  million  dollars;  but 
when  companies  are  incorporated  under  a  general,  instead  of  a 
special,  act  the  rates  are  lower,  ranging  from  $15  to  a  maximimi 
of  $600);  Vermont  ($10  to  $50). 


THE  TAXATION  OF  CORPORATIONS 


217 


The  graded  percentage  rates  are  found  in  four  states  as  fol- 
lows: Connecticut  (50  cents  per  $1,000  where  the  capital  is  not 
over  five  millions,  and  10  cents  per  $1,000  above  that);  Kansas 
(1-10  of  1%  on  the  first  $100,000  of  capital,  1-20  of  1%  on  the 
next  $400,000  and  $200  for  each  million  or  fraction  thereof 
above  $500,000  of  capital) ;  Montana  (50  cents  per  $1,000  where 
the  capital  is  not  over  one  million  dollars,  and  25  cents  per 
$1,000  above  that) ;  and  South  Carolina  (one  mill  on  each  dollar 
up  to  $100,000  of  capital,  i^  mill  from  $100,000  to  a  million  dol- 
lars, and  34  rnill  on  each  dollar  of  capital  over  a  million  dollars) . 

The  mixed  graded  rates,  partly  fixed  and  partly  percentage, 
are  found  in  nine  states  as  follows :  Colorado  ($20  if  the  capital 
is  not  over  $50,000,  and  20  cents  on  each  additional  $1,000); 
Delaware  (the  same  as  Colorado);  Illinois  ($30  where  the 
capital  is  not  over  $2,500,  $50  if  not  over  $5,000,  and  $1  for 
each  additional  $1,000) ;  Iowa  ($25  plus  $1  on  each  $1,000  where 
the  capital  is  over  $10,000) ;  Minnesota  ($50  for  the  first  $50,000 
of  capital,  $5  for  every  additional  $10,000);  Mississippi  ($20 
where  the  capital  is  not  over  $10,000,  $40  to  $60  where  the  cap- 
ital ranges  from  $10-$50,000,  and  1-10  of  1%  where  the  capital 
is  $50,000  and  over);  Nebraska  ($10  and  in  addition  10  cents 
per  $1,000  where  the  capital  is  over  one  million  dollars)  and 
Wyoming  ($5  where  the  capital  is  not  over  $5,000,  $10  on  capital 
between  $5-$10,000,  and  5  cents  on  each  additional  $1,000). 

In  four  states — Maine,  New  Hampshire,  New  Mexico  and 
Wisconsin — there  is  a  very  complicated  system,  the  rates  vary- 
ing with  different  classes. 

In  eleven  states — Alabama,  Kentucky,  New  Jersey,  New 
York,  North  Carolina,  Ohio,  Pennsylvania,  Rhode  Island, 
Texas,  Virginia  and  Wyoming — the  rates  are  payable  also  on  a 
subsequent  increase  of  the  capital  stock. 

In  many  of  the  above  states  the  tax  is  now  levied  on  foreign 
as  well  as  on  domestic  corporations;  while  some  states  follow 
New  York  in  imposing  the  tax  also  on  joint-stock  companies. 

The  modifications  introduced  into  the  organization  tax  as  a 
result  of  the  recent  development  of  shares  without  par  value 
are  analogous  to  those  referred  to  above  ^  in  connection  with 
the  franchise  tax. 

These  taxes  have  really  little  in  common  with.  Mie  corpora- 
tion taxes  properly  so  called.  In  Pennsylvania  and  Ohio,  for 
instance,  the  payment  is  held  to  be  not  a  tax  at  all,  but  a  price 

^  Supra,  p.  213. 


218 


ESSAYS  IN  TAXATION 


paid  for  the  chartered  privilege.  The  distinction  between  the 
tax  on  corporate  chartei-s  and  the  corporation  tax  proper  can, 
perhaps,  best  be  expressed  by  saying  that  if  the  latter  is  a  tax 
on  the  right  to  be,  the  former  is  a  tax  on  the  right  to  become. 


III.  Bases  of  the  Tax 

The  summary  just  presented  shows  the  chaos  of  principle 
in  which  the  whole  subject  is  involved.  An  analysis  of  the 
facts  discloses  no  less  than  thirteen  important  methods  of 
taxing  corporations,  not  counting  the  various  combinations 
of  method  which  are  practised  in  some  states.  The  bases  on 
which  the  taxes  are  assessed  are  as  follows : — 

1.  Value  of  the  property,  i.  e.,  the  realty  plus  the  visible  and 
invisible  personalty.  This  was  originally  the  universal  method 
and  it  is  still  the  practice  in  the  great  majority  of  cases. 

2.  Cost  of  the  property.  This  was  the  general  rule  in  New 
Jersey  from  1873  to  1876  as  to  all  railroad  companies,  and  is 
still  the  rule  in  isolated  cases,  as  in  New  York  in  the  local 
taxation  of  telegraph  companies. 

3.  Capital  stock  at  par  value.  This  is  true  of  the  general  cor- 
poration law  in  New  Jersey,  of  mining  companies  in  Massa- 
chusetts, and  of  banks  and  savings  institutions  in  Pennsylvania. 

4.  Capital  stock  at  market  value.  This  is  true  of  the  gen- 
eral corporation  law  in  Massachusetts  and  in  New  York  when 
appHed  to  corporations  where  the  dividends  are  less  than  six 
per  cent.  It  was  true  of  railroads  in  Connecticut  between 
1849  and  1864.  It  is  also  the  custom  in  local  taxation  in  many 
states. 

5.  Capital  stock  plus  bonded  debt  at  market  value.  This  is 
true  of  all  corporations  in  Pennsylvania  and  of  railroads  in 
Georgia  and  in  Illinois.  In  the  case  of  railroads  in  New  Jersey 
and  of  corporations  in  general  in  Illinois  and  several  other 
states,  only  the  surplus  of  this  valuation  over  the  value  of  the 
tangible  property  is  made  the  basis  of  the  tax. 

6.  Capital  stock  plus  total  debt,  both  funded  and  floating. 
This  is  true  of  railroads  in  Connecticut,  and  in  a  measure 
true  of  corporations  in  general  in  California  and  Rhode  Island. 
It  was  true  of  steamboat  companies  and  of  similar  corporations 
in  Virginia  during  the  Civil  War. 

7.  Banded  debt  or  loans.  This  was  true  of  railroads  and 
canals  in  Virginia  from  1872  to  1874,  and  is  now  true  of  all 


THE  TAXATION  OF  CORPORATIONS 


219 


corporations  in  Pennsylvania.    In  this  case,  however,  it  is  only 
supplementary  to  the  tax  on  capital  stock. 

8.  Business  transacted.  This  is  true  in  several  of  the  New 
England  states  of  savings  banks  taxed  on  their  deposits;  in 
California,  Maine  and  New  York  of  foreign  banks;  in  New 
Hampshire  and  Vermont  of  trust  companies  taxed  on  deposits; 
in  Connecticut  and  Massachusetts  of  insurance  companies  taxed 
on  the  amount  insured;  in  Montana  of  telegraph  companies 
taxed  on  the  instruments;  in  Connecticut,  Florida,  Montana  and 
Tennessee  of  telephone  companies  taxed  on  the  number  of  tele- 
phone transmitters;  in  several  Southern  states  of  sleeping-car 
companies  taxed  according  to  the  number  and  mileage  of  cars; 
in  Delaware  of  railroads  taxed  on  the  number  of  locomotives 
and  passengers.  It  was  also  true  in  Pennsylvania  from  1868 
to  1874  of  railroads;  from  1868  to  1881,  of  coal  companies 
taxed  on  tonnage;  and  from  1870  to  1889  of  boom  companies 
taxed  on  the  number  of  logs  rafted. 

9.  Gross  earnings.  This  is  true  in  many  states  of  insurance 
companies  taxed  on  gross  premiums,  and  of  transportation 
and  other  public-service  companies  taxed  on  gross  receipts. 

10.  Dividends.  This  is  true  of  gas  and  electric  light  com- 
panies in  Delaware,  New  Jersey  and  New  York,  and  of  turn- 
pike companies  in  Kentucky.  It  was  formerly  true  of  banks 
and  iron  companies  in  Pennsylvania,  and  of  banks  and  in- 
surance companies  in  Ohio  and  Virginia  and  of  corporations  in 
general  in  Alabama. 

11.  Capital  stock  according  to  dividends.  This  is  true  in 
New  York  of  corporations  not  subject  to  income  tax,  when 
dividends  are  at  least  six  per  cent.  It  was  formerly  true  of 
banks  in  North  Carolina  and  of  all  corporations  in  Pennsylvania. 

12.  Net  earnings  or  income.  This  is  true  of  railroads  in 
Delaware;  of  street  railroads  in  Massachusetts  and  Rhode 
Island;  of  insurance  companies  in  a  number  of  states;  and  of 
corporations  in  general  in  those  states  which  like  Connecticut, 
Massachusetts,  Mississippi,  Missouri,  Montana,  New  York, 
North  Dakota  and  Virginia  now  impose  corporate  income  taxes. 

13.  Franchise.  This  is  true  of  a  large  number  of  cases;  but 
the  temi  franchise,  as  we  shall  see,  denotes  nothing  definite, 
and  the  value  of  the  franchise  is  measured  by  each  one  of  the 
preceding  twelve  tests  except  that  of  property. 

All  the  above  methods  may  really  be  reduced  to  three:  taxes 
on  property  (nos.  1-7  and  11);  taxes  on  business  (no.  8);  and 


220 


ESSAYS  IN   TAXATION 


taxes  on  earnings  (nos.  9,  10  and  12).  Virtually,  as  we  shall 
see,  the  choice  lies  between  taxes  on  property  and  taxes  on 
earnings. 

From  this  survey  of  the  existing  confusion,  it  is  plain  that 
we  are  still  groping  in  the  dark  and  that  no  one  method  has  yet 
pre-eminently  commended  itself  to  the  American  sense  of 
justice  and  expediency.  In  the  next  chapter  we  shall  learn 
the  judicial  interpretation  put  upon  these  various  methods, 
and  shall  attempt  to  analyze  the  situation  from  the  economic 
point  of  view.  That  some  change  is  imperative  seems  evident; 
precisely  what  the  change  should  be  can  be  ascertained  only 
after  careful  consideration.  It  is  a  complicated  problem  that 
confronts  us. 


CHAPTER  VII 


THE   TAXATION  OF  CORPORATIONS 


II 


THE   PRINCIPLES 


In  the  preceding  chapter  we  traced  the  history  and  actual 
condition  of  tha  corporation  tax  in  the  United  States.  The 
whole  subject  was  shown  to  be  involved  in  almost  inextri- 
cable confusion,  amid  which,  however,  some  twelve  different 
bases  for  levying  the  tax  might  be  distinguished.  These,  it 
will  be  remembered,  were  the  value  of  the  property,  capital 
stock  at  par  value,  capital  stock  at  market  value,  capital  stock 
plus  bonded  debt,  capital  stock  plus  total  debt,  loans,  busi- 
ness, gross  earnings,  dividends,  capital  stock  according  to  divi- 
dends, net  earnings  and  franchise.  In  the  attempt  to  analyze 
these  methods  it  may  be  well  to  begin  with  the  last,  on  account 
of  its  obscurity  as  well  as  of  its  importance. 


ft! 


I.  The  Franchise  Tax 

At  the  outset  we  are  confronted  by  the  question:  what  is 
a  franchise  tax?  The  matter  was  first  brought  squarely  before 
the  public  by  the  provisions  of  the  California  constitution 
of  1879,  and  since  then  by  tax  laws  of  several  states  which 
prescribe  that  franchises  of  corporations  shall  be  separately 
assessed.  Before  we  can  discuss  the  franchise  tax,  however, 
we  must  attempt  to  ascertain  what  a  franchise  really  is. 

Blackstone  defines  a  franchise  as  ''a  royal  privilege  or  branch 
of  the  King's  prerogative  subsisting  in  the  hands  of  a  subject." 
His  definition  is  obviously  too  vague  for  our  purposes.  The  Su- 
preme Court  of  the  United  States  has  given  this  definition: 

A  franchise  is  a  right,  privilege  or  power  of  public  concern  which 
ought  not  to  be  exercised  by  private  individuals  at  their  mere  will  and 
pleasure,  but  which  should  be  reserved  for  public  control  and  adminis- 
tration, either  by  the  government  directly  or  by  public  agents  acting 

221 


222 


ESSAYS  IN   TAXATION 


THE  TAXATION  OF  CORPORATIONS 


223 


under  such  conditions  and  regulations  as  the  government  may  impose 
in  the  public  interest  and  for  the  public  security.  ^ 

This  definition,  however,  is  somewhat  too  narrow,  since  it 
emphasizes  unduly  the  element  of  public  control  and  public 
interest.  These  are  indeed  very  desirable  adjuncts,  but  they 
scarcely  seem  to  be  indispensable  parts  of  the  conception. 
Nothing  is  more  common  than  the  possession  by  a  purely  private 
corporation  of  a  franchise— for  example,  the  mere  privilege 
to  act  as  a  corporation.  Furthermore,  a  privilege  of  a  pubUc 
character,  like  that  possessed  by  a  railway,  is  not  necessarily 
confined  to  corporations.  Thus,  there  is  nothing  to  prevent 
the  grant  of  the  right  of  emineftt  domain  to  private  persons. 
We  therefore  conclude  that  a  franchise  in  the  wider  sense  is 
simply  a  right  conferred  by  government  of  conducting  an 
occupation  either  in  a  particular  way  or  accompanied  with 
particular  privileges.  The  motive  may  be  either  public  welfare 
or  public  revenue.  This  can  be  clearly  seen  by  tracing  the 
historical  development  of  the  franchise. 

One  of  the  chief  sources  of  royal  income  in  mediaeval  Europe 
consisted  in  the  so-called  ''fines  for  licenses,  concessions,  and 
franchises."  These  were  payments  by  individuals  or  associa- 
tions for  all  kinds  of  special  privileges,  such  as  to  secure  the 
general  favor  of  the  crown,  to  retain  or  to  quit  office,  to  obtain 
the  right  of  exporting  commodities,  to  conduct  some  business 
in  a  particular  way,  to  obtain  special  jurisdictional  privileges, 
to  possess  the  right  oi  firma  burgi,  and  so  on."^  A  most  common 
instance  can  be  found  in  the  trading  privileges  of  the  guilds, 
granted  chiefly  for  the  sake  of  the  accruing  emoluments.  Similar 
to  these  mediaeval  concessions  are  the  modern  licenses,  especially 
in  the  Southern  commonwealths,  which  are  conferred  on  in- 
dividuals and  corporations  alike,  and  in  most  cases  for  purely 
fiscal  reasons.  What  are  called  franchise  taxes  elsewhere  are 
included  in  the  South  in  the  privilege  or  occupation  taxes. 
A  franchise  of  an  individual  or  of  a  corporation  is,  therefore, 
simply  a  privilege — something  over  and  above  the  value  of 
the  property,  and  in  a  measure  analogous  to  the  "good  will" 

1  California  vs.  Southern  Pacific  R.  R.  Co.,  127  U.  S.  40. 

« A  characteristic  example  of  a  fine  or  franchise  hartl  to  classify  is  this: 
The  wife  of  Hugo  de  Neville  paid  the  king  two  hundred  hens  "eo  quod 
possit  jacere  una  nocte  cum  domino  suo"  (who  happened  to  be  in  prison). 
Rotuli  Finium,  6;  quoted  in  Madox,  History  of  the  Exchequer,  I,  p.  471. 


of  a  firm.  It  is  the  indefinite  something  which  gives  vitafity 
to  the  enterprise  and  makes  its  business  worth  having. 

In  the  case  of  a  corporation  this  indefinite  something  is  the 
privilege  that  individuals  possess  to  act  as  one,  with  legal 
individuality  and  immortality,  and  with  divisible  share  capital. 
This  is  a  privilege  which  corporations  share  equally  with  joint- 
stock  companies;  accordingly,  the  corporation  tax  is  frequently 
made  applicable  to  such  associations.  A  modern  stock  corpora- 
tion indeed  possesses  another  privilege,  which  is  exclusive  to  it, 
namely,  limited  liability.  The  corporate  franchise  therefore  is 
really  the  privilege  of  juristic  personality  and  limited  liability; 
it  is  the  right  to  exist  as  a  corporation.^  Since  it  is  something 
separate  and  apart  from  the  property  of  the  corporation,  it 
is  capable  of  being  taxed.- 

What  has  been  said  applies,  however,  only  to  domestic 
corporations.  In  the  case  of  a  foreign  corporation,  the  state 
which  has  not  given  the  franchise  cannot  tax  it.  With  a 
domestic  corporation  the  franchise  or  right  to  exist  is  an  empty 
right  if  the  corporation  may  not  transact  business;  the  right 
to  exist  is  therefore  inextricably  bound  up  with  the  right  to 
carry  on  the  business.  But  as  regards  a  foreign  corporation, 
the  two  things  are  distinct,  and  the  state  can  tax  only  the  privi- 
lege of  carrying  on  the  business  within  its  borders.  The  cor- 
porate franchise  has  no  existence  apart  from  the  laws  of  the 
state  which  created  it.  In  order  to  avoid  trouble,  therefore, 
the  corporation  tax  is  usually  imposed  on  "the  corporate 
franchise  or  business;"  and  the  New  York  tax  has  been  upheld 
as  applicable  to  foreign  corporations  as  a  tax  on  their  business, 
not  on  their  franchise.^ 

The  denial  of  the  right  to  tax  the  franchises  of  foreign  cor- 
porations appfies  equally  to  corporations  chartered  by  the 
United  States  which  are  not  legallj^  foreign  corporations.  But 
where  the  corporation,  as  in  the  case  of  a  railroad,  exercises 

*  "By  the  term  corporate  franchise  we  understand  is  meant  the  right 
or  privilege  given  by  the  state  to  two  or  more  persons  of  being  a  corpora- 
tion, that  is,  of  doing  business  in  a  corporate  capacity."  Home  Insurance 
Co.  vs.  State  of  New  York,  134  U.  S.  594.  Cf.  Western  Union  Telegraph 
Co.  vs.  Mayer,  28  Ohio  State,  521. 

2  "Nothing  is  better  settled  than  that  the  franchise  of  a  private  corpora- 
tion ...  is  property  and  of  the  most  valuable  kind,  as  it  cannot  be  taken 
for  public  use  without  compensation."  Wilmington  R.  R.  Co.  vs.  Reed,  13 
Wall.  264,  268. 

'  People  vs.  Equitable  Trust  Co.  of  New  London,  Conn.,  96  N.  Y.  396. 


224 


ESSAYS  IN  TAXATION 


additional  privileges  in  the  state,  it  is  held  that  it  enjoys  a 
state  franchise  as  well  as  a  federal  franchise  and  that  a  state  tax 
may  be  imposed  on  the  former  franchise  without  being  an 
attack  upon  the  privilege  granted  by  the  federal  government.* 
This,  however,  does  not  apply  to  national  banks  which  cannot 
be  subjected  to  license  or  privilege  taxes.-  Some  recent  cases 
in  Pennsylvania  have  even  held  that  the  tax  on  capital  stock 
is  invalid  as  to  stock  invested  in  a  patent  right,  because  such 
taxation  involves  a  property  right  which  depends  for  its  existence 
exclusively  on  the  federal  constitution  and  on  an  act  of  Con- 
gress.^ This  seems  to  be  an  extreme  application  of  the  general 
principle  which,  if  persisted  in,  will  render  a  great  part  of  our 
corporation  tax  laws  practically  nugatory.  For  almost  every 
corporation  utilizes  something  covered  by  a  patent;  and  if  it  is 
held  that  the  capital  stock  represents  in  whole  or  in  part  this 
patented  property,  the  corporation  would  to  that  extent  escape 
taxation.  Later  decisions  in  other  states,  like  New  York  and 
Maryland,  seem  to  take  the  proper  view.  For  in  New  York 
it  has  been  held  that  even  if  the  entire  capital  of  a  corporation 
is  invested  in  patent  rights,  it  is  none  the  less  subject  to  the 
capital  stock  tax.^  And  the  same  rule  has  been  extended  to 
trade-marks.^ 

Subject  to  these  qualifications  and  to  the  principle,  to  be 
discussed  below,  that  no  commonwealth  may  impose  a  fran- 
chise tax  to  interfere  with  interstate  commerce,  the  taxation 
of  corporate  franchise  has  no  limitation,  except  the  discretion 
of  the  taxing  power .^ 

The  franchise  that  has  been  discussed  thus  far  is  the  privilege 
of  doing  business.  When,  however,  we  analyze  a  little  more 
closely  the  concept  of  a  corporate  franchise  we  see  that  there 
are  other  aspects  to  the  problem.    In  order  to  do  business,  the 

» People  vs.  Central  Pacific  R.  R.  Co.,  105  Cal.  576;  and  California  vs. 
Pacific  Railroad  Companies,  127  U.  S.  1. 

2  Mayor  vs.  National  Bank  of  Macon,  59  Ga.  648;  City  of  Carthage  vs. 
Bank  of  Carthage,  71  Mo.  508;  National  Bank  of  Chattanooga  vs.  Mayor,  8 

Heiskell,  814. 

3  Commonwealth  vs.  Westinghouse  Co.,  151  Pa.  State,  265;  Common- 
wealth vs.  Air  Brake  Co.,  id.  265;  Commonwealth  vs.  Philadelphia  Co.,  157 
Pa.  527;  Commonwealth  vs.  Lehigh  C.  and  I.  Co.,  162  Pa.  State,  603. 

*  People  ex  rel.  U.  S.  Aluminum  Plate  Co.  vs.  Knight,  174  N.  Y.  475  (1903) ; 
Crown  Cork  and  Seal  Co.  vs.  State,  87  Md.  687. 

5  People  ex  rel.  Spencerian  Pen  Co.  vs.  Kelsey,  105  App.  Div.  133  (1905). 

«»  Delaware  Railroad  Tax  Case,  18  Wall.  231;  California  vs.  Southern 
Pacific  R.  R.  Co.,  127  U.  S.  41. 


THE  TAXATION  OF  CORPORATIONS 


225 


corporation  must  first  come  into  being;  and  even  after  the  corpo- 
ration has  been  created,  it  does  not  necessarily  follow  that  it  will 
do  business.  Consequently  we  must  distinguish  between  the 
creation  of  a  corporation  and  the  exercise  of  its  powers.  If 
the  latter  is  termed  the  franchise  to  do  or  to  act,  the  former 
might  be  called  the  franchise  to  be  or  to  become.  For  this 
privilege  to  be,  as  we  have  learned,  virtually  all  the  states  make 
a  charge;  and  while  ordinarily  called  a  fee,  it  is  not  infrequently 
termed  a  franchise  tax. 

In  addition  to  the  franchise  to  be  and  the  franchise  to  do, 
there  is,  however,  still  a  third  kind  of  franchise,  which  it  has 
become  usual  of  recent  years  to  call  a  special  franchise.  This 
is  the  right  accorded  to  certain  corporations  to  possess  privileges 
not  enjoyed  by  corporations  in  general.  The  most  important 
of  such  special  privileges  is  the  right  to  use  public  highways, 
and  it  is  for  this  reason  that  the  corporations  enjoying  this  right 
are  generally  called  public-service  corporations.  This  special 
franchise  was  first  brought  into  prominence  in  New  York. 
In  that  state  it  is  permissible  to  deduct  debts  from  personalty, 
but  not  from  real  estate.  It  was  accordingly  easy  for  corpora- 
tions to  escape  taxation  on  their  capital,  which  as  we  know  is 
still  locally  taxable  in  New  York.  For  when  the  bonded  in- 
debtedness exceeded  the  capital  stock,  there  would  be  nothing 
left  on  which  to  levy  the  tax  except  the  real  estate.  When  an 
attempt  was  made  later  to  assess  the  value  of  the  franchise 
over  and  above  that  of  the  personal  property,  the  attempt  was 
frustrated  by  the  same  facility  of  deducting  the  value  of  the 
bonds.  Hence  an  ingenious  plan  was  devised.  A  franchise 
in  general,  if  it  be  any  kind  of  property,  is  personal  property. 
But  it  was  now  suggested  that  a  franchise  enjoyed  by  some 
corporations  only,  to  use  the  streets,  on  the  surface  or  above  or 
below  the  level,  might  properly  be  termed  an  interest  in  real 
estate;  and  if  so,  there  could  not,  under  the  New  York  system, 
be  any  set-off  on  account  of  mortgage  bonds.  Accordingly  by 
the  law  of  1899  a  new  category  of  real  estate  was  created  in 
New  York,  to  be  known  as  a  special  franchise.  The  law  added 
to  the  definition  of  taxable  real  property  the  following: — 

"The  value  of  all  franchises,  rights  or  permission  to  construct,  main- 
tain or  operate  the  same  [s\irface,  underground  or  elevated  railroadsl 
in,  under,  above,  on  or  through  streets,  highways  or  public  places;  .  .  . 
and  the  value  of  all  franchises,  rights,  authority  or  permission  to  con- 
struct, maintain  or  operate  in,  under,  above,  upon,  or  through  any 


il 


226 


ESSAYS  IN  TAXATION 


streets,  highways  or  public  places,  any  mains,  pipes,  tanks,  conduits 
or  wires,  with  their  appurtenances,  for  conducting  water,  steam,  heat, 
light,  power,  gas,  oil  or  other  substance,  or  electricity  for  telegraphic, 
telephonic  or  other  purposes.  ...  A  franchise,  right,  authority  or 
permission  specified  in  this  subdi\^sion  shall  for  the  purposes  of  taxa- 
tion be  known  as  a  'special  franchise.'  "  A  special  franchise  shall  be 
deemed  to  include  the  value  of  the  tangible  property  situated  in,  upon 
under  or  above  any  street,  highway,  public  place  or  pubUc  waters  in 
connection  with  the  special  franchise  in  19G7.i 

Under  this  ingenious  definition  of  a  special  franchise  all 
public-service  corporations  in  New  York  have  now  been  com- 
pelled to  bear  a  far  greater  burden  of  taxation  than  was  pre- 
viously the  case.^ 

The  new  conception  soon  spread  to  other  states,  although  m 
most  cases  the  special  franchise  is  either  measured  by  a  certain 
proportion  of  gross  receipts  as  in  New  Jersey,  or  is  treated  as  a 
separate  constituent  of  property  without  any  decision  as  to 
whether  it  is  realty  or  personalty.  Only  a  few  states,  like  Cali- 
fornia, follow  New  York  in  treating  the  special  franchise  as  an 
interest  in  real  estate. 

Thus  we  see  that  there  are  now  in  the  American  system  of 
corporate  taxation  three  kinds  of  franchises— the  franchise  to  be, 
the  franchise  to  do,  and  the  franchise  to  act  in  a  particular  way 
or  to  enjoy  a  special  privilege.  It  is  interesting  to  observe  that 
in  the  California  law  of  1911  all  three  species  of  franchises  are 
included  in  the  definition.^ 

1  An  amendment  adopted  later,  provided  that  "the  term  'special  fran- 
chise '  shall  not  be  deemed  to  include  the  crossing  of  a  street,  highway  or 
public  place  outside  the  limits  of  a  city  or  incorporated  village  where  such 
crossing  is  less  than  250  feet  in  length,  unless  such  crossmg  be  the  con- 
tinuation of  an  occupancy  of  another  street,  highway  or  public  place. 
Under  this,  in  practice,  ordinary  railroad  crossings  were  not  treated  as 
special  franchises.  But  a  later  amendment,  in  1907,  made  a  steam  railroad 
crossing  in  a  city  or  village  assessable  as  a  special  franchise.  As  special 
franchises  are  assessed  by  a  state  board,  while  ordinary  real  estate  is  oe- 
sessed  by  local  officials,  this  has  caused  much  confusion  in  the  actual  ad- 
ministration. Cf.  the  interesting  monograph  by  Benj.  E.  Hall,  one  of  the 
New  York  State  Tax  Commissioners,  Admvnislrative  Difficulties  of  the 
Special  Franchise  Tax  Law.  Address  before  the  State  Conference  on  Taxation 
held  at  Utica,  Albany,  19U.  ,.    ,  „  .     ^      .    , 

2C/.  Seligman,  "The  Franchise  Tax  Law  in  New  York,"  m  Qwirterly 
Journal  of  Economics,  vol.  xiii.  (1899),  p.  445  et  seq. 

3  "  These  franchises  shall  include  the  actual  exercise  of  the  nght  to  be  a 
corporation  and  to  do  business  as  a  corporation,  under  the  laws  of  this 
state  and  the  actual  exercise  of  the  right  to  do  business  as  a  corporation 
in  this  state  when  such  right  is  exercised  by  a  corporation  incorporated 


THE  TAXATION  OF  CORPORATIONS 


227 


It  must  further  be  observed,  however, — although  it  is  an 
observation  that  has  hitherto  eluded  the  attention  of  well- 
nigh  all  writers  on  the  subject — that  amid  the  multiplicity 
of  meanings  attached  to  the  word  franchise  two  leading  ideas 
are  discernible  in  its  relation  to  taxation.  We  refer  here  not 
to  the  distinction  just  discussed  between  a  franchise  to  be,  a 
franchise  to  do,  and  a  franchise  to  act  in  a  particular  way;  but 
to  the  distinction  between  franchises  based  on  their  assumed 
relation  to  property.  Here  there  are  two  fundamental  con- 
ceptions. The  one  is  the  conception  of  a  franchise  as  a  part 
of  property;  the  other  is  the  conception  of  a  franchise  as  some- 
thing distinct  from,  or  even  opposed  to,  property.  The  first 
conception  leads  to  the  idea  of  a  franchise  tax  as  something  of 
the  same  nature  as  a  tax  on  physical,  tangible  property,  but 
superadded  to  it.  This  is  the  case  in  all  the  states  which  include 
the  value  of  the  franchise  in  the  ad  valorem  tax,  as  in  Michigan, 
Wisconsin,  Illinois,  or  even  New  York  in  the  case  of  the  special 
franchise  tax.  In  all  these  cases  the  franchise  tax  is  thought  of 
as  a  property  tax;  but  it  is  a  tax  on  intangible  property  or  on 
an  intangible  something  of  which  the  concept  of  property  is 
predicated,  whether  in  the  eyes  of  the  law  it  be  treated  as  real 
property  or  as  personal  property.  The  other  conception  leads 
to  the  franchise  tax  as  something  distinct  from,  or  opposed  to, 
M  property  tax,  as  in  the  case  of  the  capital  stock  tax  in  New 
York.     Let  us  elucidate  these  conceptions. 

If  we  take  up  first  that  conception  of  a  franchise  which  leads 
to  the  franchise  tax  as  a  property  tax,  the  question  at  once 
arises  as  to  how  the  value  of  the  franchise  as  a  piece  of  taxable 
property  is  to  be  ascertained.  It  is  obvious  that  here  we  are 
face  to  face  with  great  diflBculties. 

We  have  seen  that  there  are  not  less  than  twelve  separate 
methods  of  taxing  corporations  and  that  each  of  these  methods, 
with  one  exception,  is  declared  to  involve  a  franchise  tax. 
There  are  yet  other  methods  of  measuring  franchise,  such  as 
the  value  of  the  capital  stock  less  the  value  of  the  property, 

under  the  laws  of  any  other  state  or  country,  also,  the  right,  authority, 
privilege,  or  permission  to  maintain  wharves,  ferries,  toll  roads  and  toll 
bridges,  and  to  construct,  maintain  or  operate  in,  under,  above,  upon, 
through,  or  along  any  streets,  highways,  public  places,  or  waters,  any 
mains,  pipes,  canals,  ditches,  tanks,  conduits,  or  other  means  for  conduct- 
ing water,  oil,  or  other  substances."  Statutes  of  California,  1911,  chap.  335. 
Cf.  the  article  by  Professor  C.  C.  Plehn,  "The  Taxation  of  Franchises  in 
California,"  in  the  National  Municipal  Review,  vol.  i.  (1912),  p.  337  et  seq. 


^!;:. 


228 


ESSAYS  IN  TAXATION 


I 


the  value  of  the  stock  less  the  value  of  the  tangible  property, 
the  value  of  the  stock  less  the  value  of  the  realty,  the  value 
of  the  stock  and  bonds  less  each  or  all  of  these  items,  etc.  There 
is  a  total  lack  of  uniformity.  Each  commonwealth  measures 
the  franchises  of  its  corporations  in  its  own  way;  and  frequently 
a  given  commonwealth  measures  the  franchises  of  different 
corporations  in  entirely  different  ways.  There  is  an  utter 
absence  of  any  common  standard  of  measurement.  Capital 
stock,  stock  minus  property,  stock  minus  realty,  bonded  debt, 
business,  gross  earnings,  dividends,  profits,  etc.,  are  each  declared 
to  be  the  value  of  the  franchise.  The  result  is  hopeless  confu- 
sion. It  would  be  useless  to  examine  the  methods  of  all  the 
states;  a  few  examples  will  suffice. 

The  state  board  of  assessors  of  New  Jersey  have  published 
since  1884  annual  reports  in  which  they  discuss  the  details 
of  corporate  assessment.    In  the  case  of  railroads  they  adopted 
the  following  plan.^    The  market  value  of  the  stock  is  added  to 
the  market  value  of  the  debt;  from  this  aggregate  the  total 
value  of  the  tangible  corporate  property  is  deducted,  and  the 
remainder  is  declared  to  be  the  "adventitious  value  of  the 
entire  road,  its  privileges  included."     Sixty  per  cent  of  this 
is  taken  as  the  value  of  the  franchise,  to  which  is  added  the 
value  of  the  real  and  tangible  property,  known  as  the  "abstract 
value"  of  the  road,  making  a  total  which  is  termed  the  entire 
value  of  the  railway  for  purposes  of  taxation.    This,  however, 
is  not  all;  for  if  the  value  of  the  tangible  property  exceeds  the 
value  of  the  stock  and  debt,  the  board  declares  the  franchise 
to  be  twenty  per  cent  of  the  gross  earnings.    It  will  be  readily 
perceived  that  this  measurement  of  a  franchise,  which  may 
give  a  result  less  than  nothing,  is  rather  awkward.     Indeed, 
the  courts  of  New  Jersey  have  overturned  this  portion  of  the 
assessors'   standard   by   pronouncing  the  estimate  based  on 
gross  earnings  unconstitutional;  ^  but  the  main  element  in  the 
method  of  valuation  was  upheld  on  the  easy-going  principle 
that  no  substantial  injustice  was  done.    It  is  this  absence  of 
"substantial  injustice"  to  which  is  due  the  chaotic  condition 
of  franchise  taxation  in  this  country  to-day. 

»  Report  of  the  State  Board  of  Assessors  of  New  Jersey,  1884,  p.  26;  1885, 
p.  11;  1886,  p.  28;  1888,  p.  6. 

*  Case  of  Railroad  Tax  Law,  N.  J.  Court  of  Errors  and  Appeals,  decided 
May  29,  1886.  The  case  may  be  found  in  full  in  the  Third  AnnwU  Report 
of  the  State  Board  of  Assessors,  1886,  pp.  79-173. 


>f 


THE  TAXATION  OF  CORPORATIONS 


229 


In  Illinois  and  in  California,  the  method  of  taxing  franchises 
is  not  far  different  from  that  of  New  Jersey.  In  Illinois,  the 
board  of  equalization  adds  tiie  cash  value  of  the  stock  to  that 
of  the  debt  (excluding  current  debt),  and  pronounces  the  result 
to  be  the  fair  cash  value  of  the  capital  stock  including  the 
franchise.  From  this  the  board  deducts  the  equalized  value  of 
all  the  tangible  property,  and  declares  the  remainder  to  be 
the  value  of  the  capital  stock  and  franchise  subject  to  taxation. 
This  method  was  upheld  by  the  Supreme  Court  of  the  United 
States  as  being  "probably  as  fair  as  any  other."  ^  In  California, 
the  value  of  the  franchise  is  determined  by  subtracting  from 
the  actual  value  of  the  capital  stock  or  of  the  stock  and  bonds 
the  value  of  all  the  items  of  property.^  In  some  cases  only  a 
fraction  of  the  remainder  is  declared  to  be  the  value  of  the 
franchise.  The  only  change  introduced  by  the  law  of  1911  is 
that  in  the  case  of  ordinary  corporations,  exclusive  of  public- 
service  companies  and  banks,  the  good  will  is  no  longer  to  be 
included  in  the  value  of  the  franchise — a  curious  provision  in 
view  of  the  fact  that  in  many  corporations  the  good  will  of  the 
business  constitutes  the  major  portion  of  the  franchise  value. 
In  Kentucky,  the  assessors  deduct  from  the  amount  of  the 
capital  stock  the  assessed  value  of  all  tangible  property  taxed 
in  the  state,  and  declare  the  remainder  to  be  the  value  of  the 
franchise.  In  the  case  of  foreign  companies,  however,  they 
take  that  proportion  of  the  capital  that  the  gross  receipts  in 
the  state  bear  to  the  total  gross  receipts,  and  then  deduct  the 
value  of  the  tangible  property  assessed  in  the  state.  In  the  case 
of  transportation  companies  they  take  only  that  proportion  of 
the  capital  stock  which  the  length  of  the  line  within  the  state 
bears  to  the  total  length.^  In  Indiana,  if  the  full  value  of  the 
franchise  is  represented  by  the  capital  stock,  the  franchise  is  not 
taxed;  but  when  the  franchise  is  of  greater  value  than  the 
capital  stock,  it  is  provided  that  the  franchise  "shall  be  as- 
sessed at  its  full  cash  value,"  and  that  the  capital  stock  shall 
not  be  taxed.  ^ 

*  State  Railroad  Tax  Cases,  2  Otto,  575.  Cf.  Railway  vs.  Backus,  154 
U.  S.  421. 

2  Approved  as  to  public-service  corporations  in  Spring  Valley  Water 
Works  vs.  Schottler,  62  Cal.  69,  118;  Burke  vs.  Badlam,  57  Cal.  594;  San 
Josd  County  vs.  January,  57  Cal.  614;  and  as  to  corporations  in  general  in 
Bank  of  California  vs.  San  Francisco,  142  Cal.  276. 

«  Ky.  Laws  of  1892,  chap.  102,  art.  iii.,  §  3. 

*  Ind.  Law  of  Mar.  6,  1891,  §  74;  now  R.  S.  1908,  §  10324. 


230 


ESSAYS  IN  TAXATION 


Of  considerable  interest  are  the  methods  that  have  been 
employed  by  IVIichigan  and  Wisconsin,  especially  after  the 
abandonment  of  the  system  of  specific  taxes  on  the  earnings  of 
public-service  corporations  and  the  reversion  to  the  ad  valorem 
system.  In  Michigan,  after  the  passage  of  the  law  of  1901 
which  authorized  the  ad  valorem  system  in  the  case  of  railroads, 
the  appraisal  of  the  so-called  non-physical  or  inmiaterial  ele- 
ments in  the  value  of  a  railroad  was  entrusted  to  Professor 
Henry  C.  Adams.    We  quote  from  his  report: 

"  The  rule  submitted  for  the  appraisal  of  the  immaterial  values  of 
railway  properties,  or  what  I  prefer  to  term  the  capitalization  of  cor- 
porate organization  and  business  opportunity,  is  simple,  as  follows: 

"1.  Begin  with  gross  earnings  from  operation,  deduct  therefrom 
the  aggregate  of  operating  expenses  and  the  remainder  may  be  termed 
the  'income  from  operation.'  To  this  should  be  added  'income  of 
corporate  investments '  gi\'ing  a  sum  which  may  be  termed  'total  in- 
come,' and  which  represents  the  amount  at  the  disposal. of  the  cor- 
poration for  the  support  of  its  capital,  and  for  the  determination  of 
its  annual  surplus. 

"2.  Deduct  from  the  above  amount— that  is  to  say  'total  income' 
as  an  annuity  properly  chargeable  to  capital— a  certain  per  cent  of 
the  appraised  value  of  the  physical  properties. 

"3.  From  this  amount  should  be  deducted  rents  paid  for  the  lease 
of  property  operated  and  permanent  improvements  charged  directly 
to  mcome.  The  remainder  would  represent  the  siu-plus  from  the  gross 
earnings  from  the  year's  operations,  and  for  the  purposes  of  this  in- 
vestigation may  be  accepted  as  an  annuity  which,  when  capitalized 
at  a  certain  rate  of  interest,  gives  the  true  value  of  immaterial  prop- 
erties." 

Professor  Adams  himself  added  that  the  above  rule  failed 
to  appraise  the  speculative  element  in  railway  property. 

As  a  matter  of  fact,  however,  this  rule  was  applied  only  in 
part.  It  was  soon  realized  that  the  calculation  might  easily 
result  in  a  minus  quantity.  When  this  turned  out  to  be  the 
case,  the  awkwardness  of  the  situation  was  relieved,  in  part 
at  least,  by  entirely  disregarding  the  non-physical  element  in 
the  property,  and  taking  only  the  valuation  of  the  physical 
property.  We  are  told  that  in  only  26  of  the  123  railroads 
appraised  at  the  time  was  a  non-physical  value  placed  on  them.^ 

^  See  the  address  by  Robert  H.  Shields,  a  member  of  the  Michigan  State 
Board  of  Assessors,  entitled,  "Railroad  Taxation  Problems,"  in  Addresses 
and  Proceedings  of  the  Fourth  Conference  of  the  International  Tax  Associa- 
tion.   Columbus,  1911,  p.  238. 


THE  TAXATION  OF  CORPORATIONS 


231 


At  present,  the  method  actually  followed  in  Michigan,  as 
in  most  of  the  other  states  which  attempt  to  tax  the  franchise  as  a 
piece  of  property,  is  very  different.  The  laws  refrain  from  lay- 
ing down  any  rule  at  all  and  leave  the  matter  entirely  to  the 
discretion  of  the  assessing  body,  which  refuses  to  state  in  what 
its  precise  method  consists.  In  California,  e.g.  the  law  of  1911 
declared  "franchises  taxable  at  their  actual  cash  value,  in  the 
manner  to  be  provided  by  law."  But  the  law  simply  placed  the 
whole  matter  in  the  hands  of  the  state  board.  As  one  of  the 
Michigan  assessors  frankly  stated,  if  the  board  were  to  reveal 
the  grounds  of  their  valuation,  they  would  simply  invite  endless 
criticism  and  objection  on  the  part  of  the  corporations  which 
they  are  required  by  law  to  assess.^  It  is  an  open  secret,  how- 
ever, that  the  chief  rehance  of  the  Michigan  board  is  upon 
earnings,  so  that  the  value  of  the  franchise  represents  in  great 
part  a  capitalization  of  earnings.  In  Wisconsin,  again,  while 
nothing  definite  is  divulged,  it  is  generally  understood  that 
the  valuation  is  made  by  a  combination  of  the  "stock  and  bond 
method"  with  the  " capitahzation  of  earnings"  method.  But 
to  what  extent  other  criteria  are  actually  taken  into  account, 
no  one  knows.  Under  such  circumstances  we  are  confronted 
by  what  is  the  chief  objection  to  the  whole  method,  namely, 
the  danger  of  arbitrariness  and  the  lack  of  any  precise  directions 
to  guide  the  assessors  or  to  enlighten  the  public.  In  such  a 
complicated  matter  as  that  of  appraising  the  value  of  a  franchise, 
which  has  no  market  value  because  it  is  not  the  subject  of 
purchase  and  sale,  no  two  people,  however  expert,  will  agree. 
As  one  of  the  Michigan  commissioners  states:  "When  it  comes 
to  a  question  of  the  ultimate  valuation,  each  member  of  the 
board  has  his  own  opinion."  The  result  has  been  in  Michigan 
as  everywhere  else,  a  sort  of  compromise  which  differs  very 
materially  from  the  valuation  of  the  original  experts. 

It  is  clear  from  the  above  review  that  the  attempt  to  tax  the 
franchise  as  a  piece  of  property  is  highly  unsatisfactory.  If  the 
value  of  the  franchise  is  measured  by  any  one  criterion  such  as 
earnings,  or  dividends,  or  stock  and  bonds,  there  is  nothing 
gained  by  the  attempt  to  differentiate  a  franchise  tax  from  a  tax 
on  earnings  or  on  dividends  or  on  stock  and  bonds.  If,  on  the 
other  hand,  an  attempt  is  made  to  reach  the  capital  value  of  the 
franchise  by  a  method  of  appraisal,  without  resort  to  any  specific 

^  See  the  admission  in  the  Report  of  the  Ontario  Commission  on  Railway 
Taxation.    Toronto  1905,  p.  48. 


232 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


233 


criterion,  it  becomes  mere  guess  work.  We  may  agree  with  the 
authors  of  the  most  discriminating  of  recent  reports  on  the  sub- 
ject that  when  all  factors  contributing  to  value  are  supposed 
to  be  taken  into  account  and  when  in  this  way  the  board  of 
assessors  entirely  avoid  the  responsibility  of  saying  how  their 
ultimate  assessment  is  made  up,  even  assuming  it  to  be  known  to 
themselves,  such  a  "  system  obviously  has  the  fatal  defect  of 
making  it  impossible  either  for  the  railroads  or  the  general  public 
to  distinguish  between  the  most  accurate  and  conscientious 
valuation  and  mere  ignorant  guess  work  or  quite  prejudiced  and 
even  dishonest  returns.  Certainly  one  cannot  imagine  a  more 
complete  departure  from  the  fundamental  basis  laid  down  by 
the  [Michigan]  tax  commission  for  the  administration  of  the  new 

system."  ^ 

Such  is  the  difficulty  encountered  in  attempting  to  levy  a  tax 
on  the  franchise  as  a  piece  of  property.  As  we  saw  above,-  how- 
ever, the  other  conception  of  a  franchise  tax  is  that  not  of  a 
property  tax,  but  of  something  different  from  a  property  tax. 
Let  us  now  proceed  to  consider  the  meaning  of  this  other  kind  of 

a  franchise  tax. 

What  is  the  real  significance  of  the  franchise  tax  in  this 
broader  sense?  Why  is  it  desirable  that  such  a  hard  and  fast 
line  should  be  drawn  between  the  property  tax  and  the  franchise 
tax?    What  is  the  meaning  of  the  distinction? 

The  answer  is  very  plain.  In  the  first  place,  according  to 
the  constitutions  of  several  of  the  states,  the  taxes  on  prop- 
erty must  be  uniform.  If,  however,  the  corporation  tax  is 
held  to  be  a  franchise  tax,  there  is  no  necessity  of  such  uni- 
formity between  the  tax  on  individuals  and  that  on  corporations. 
Secondly,  according  to  the  principles  of  the  property  tax,  deduc- 
tions are  allowed  for  certain  classes  of  exempt  or  extra-territorial 
property.  If  the  tax  is  a  franchise  tax,  such  exemptions  cannot 
be  claimed.  Thirdly,  if  the  tax  is  a  franchise  tax,  and  not  a  tax 
on  property  or  earnings,  it  may  be  upheld  as  not  interfering 
with  interstate  commerce.  Finally,  if  the  tax  is  a  franchise  tax, 
many  of  the  objections  to  double  taxation  would,  as  we  shall 
see  later,  be  removed.  Every  commonwealth  imposing  a  fran- 
chise tax,  for  instance,  could  assess  the  entire  capital  of  a  cor- 
poration,—or  at  all  events  of  a  domestic  corporation— although 
only  a  very  small  portion  might  be  located  or  employed  within 

1  Report  of  the  Ontario  Commission,  etc.,  p.  53. 
i  Supra,  p.  227. 


the  state.  We  can  hence  readily  understand  the  persistence  with 
which  the  corporations  seek  to  uphold  the  distinction  and  to  have 
the  charge  declared  to  be  not  a  franchis(%  but  a  property  tax. 

The  question  has  arisen  almost  exclusively  in  connection 
with  the  taxation  of  deposits,  capital  stock  or  earnings.  In 
the  case  of  deposits  of  savings  banks  the  decisions  are  almost 
uniform  that  the  tax  is  one  on  the  franchise  and  not  on  the 
property;  ^  among  the  few  commonwealths  that  tax  such  depos- 
its, Connecticut,  Maine,  Maryland  and  Massachusetts  accept 
this  view.  Moreover,  since  there  is  no  necessary  relation  be- 
tween the  amount  of  the  deposits  and  the  extent  of  the  property, 
the  tax  is  valid  even  if  the  deposits  are  invested  in  United  States 
securities.  Only  one  commonwealth,  New  Hampshire,  has  held 
out  against  the  general  tendency  and  pronounced  the  tax  on 
deposits  to  be  a  property  tax.^ 

In  the  case  of  capital  stock  the  matter  is  more  compUcated 
and  the  decisions  are  more  divergent.  That  capital  stock  is  in 
one  sense  property  will  of  course  be  denied  by  no  one;  but 
whether  the  tax  on  capital  stock  is  tantamount  to  a  tax  on 
general  property  is  an  entirely  different  question.  In  several 
commonwealths  it  has  been  held  that  capital  stock  practically 
represents  the  property,  and  that  the  two  are  to  all  intents  and 
purposes  interchangeable  terms.^  As  regards  the  tax  on  capital 
stock  in  general,  other  commonwealths,  however,  have  decided, 
and  the  federal  courts  have  affirmed  the  decision,  that  it  is  not  a 
tax  on  the  property.  Thus,  it  has  been  held  that  the  Delaware 
railroad  tax  of  one-quarter  of  one  per  cent  on  the  actual  cash 
value  of  the  capital  stock  is  a  tax  not  on  the  property  or  on  the 
shares  of  individuals,  but  on  the  corporation,  measured  by  a 
certain  percentage  on  the  value  of  its  shares.^  In  like  manner 
the  Massachusetts  taxes  on  the  corporate  excess,  i.e.  on  the 
whole  value  of  the  corporate  shares  and  on  the  capital  stock  in 
excess  of  the  value  of  the  real  estate  and  machinery,  have  been 

1  Maryland  vs.  Central  Savings  Bank,  72  Md.  92;  Coite  vs.  Society  for 
Savings,  32  Conn.  173,  affirmed  in  6  Wall.  594;  Provident  Institution  vs. 
Massachusetts,  8  Wall.  611.  See  also  Commonwealth  vs.  Savings  Bank,  123 
Mass.  493;  Jones  vs.  Savings  Bank,  66  Me.  242. 

2  Bartlett  vs.  Carter,  59  N.  H.  105. 

» Jones  vs.  Davis,  3  Ohio,  474;  Burke  vs.  Badlam,  57  Cal.  594;  New  Or- 
leans vs.  Canal  Co.,  29  La.  A.  R.  851;  Whitney  vs.  Madison,  23  Ind.  331; 
County  Commissioners  vs.  National  Bank,  48  Md.  117.  But  see  Wilkens 
vs.  Baltimore,  103  Md.  293,  reversing  the  former  doctrine. 

*  The  Delaware  Railroad  Tax  Case,  18  Wall.  206. 


234 


ESSAYS  IN  TAXATION 


ll 


pronounced  taxes  on  the  franchise.^  In  a  later  case  it  has  been 
held  that  this  tax,  although  nominally  upon  the  shares  of  capi- 
tal stock,  is  in  effect  a  tax  upon  the  organization  on  account  of 
property  owTied  or  used  by  it,  and  therefore  valid.  It  is  an  ex- 
cise tax,  not  a  property  tax,  and  therefore  not  limited  by  the 
constitutional  restrictions  as  to  the  uniform  taxation  of  all 
property.'-  On  the  other  hand,  the  Connecticut  courts  have 
held  that  the  tax  on  capital  stock  and  debt  is  a  tax  not  on  fran- 
chise, but  on  property;  ^  and  the  older  cases  in  Alabama  and 
Missouri  were  similarly  decided.* 

Secondly,  in  the  case  of  capital  stock  as  measured  by  divi- 
dends, the  courts  of  Pennsylvania  and  New  York  have  arrived 
at  diametrically  opposite  conclusions.  In  Pennsylvania  a  long 
series  of  cases  has  consistently  maintained  the  doctrine  that  the 
tax  is  one  on  property.^  The  court  has  endeavored  to  lay  down 
this  rule: — 

"The  test  whether  the  tax  in  any  given  case  is  a  franchise  as  dis- 
tinguished from  a  property  tax,  would  seem  to  be  that  a  tax  accorduig 
to  a  valuation  is  a  tax  on  property,  whereas  a  tax  imposed  according 
to  nominal  value  or  measured  by  some  standard  of  mere  calculation — 
as  contrasted  with  valuation — fixed  by  the  law  itself  may  be  a  franchise 
tax."  • 

The  New  York  and  New  Jersey  courts,  on  the  other  hand, 

have  held  the  tax  on  capital  stock  to  be  a  franchise  tax.^    The 

New  York  case  was  carried  in  last  instance  to  the  federal  court. 

Of  course  the  fact  that  the  statutes  of  Massachusetts  and  New 

York  expressly  declared  the  tax  to  be  a  franchise  tax  was  of  no 

weight;  for  it  was  justly  contended  that  no  importance  should 

attach  to  mere  nomenclature.    But  the  United  States  Supreme 

Court  had  already  shown  the  tendency  of  its  thought  in  the 

Massachusetts  and  Delaware  decisions  just  cited.    In  a  subse- 

^  Hamilton  Co.  vs.  Massachusetts,  6  Wall.  632;  Commonwealth  vs.  Ham- 
ilton Manufacturing  Co.,  94  Mass.  298;  Manufacturers'  Insurance  Co.  va. 
Loud,  99  Mass.  146;  Portland  Bank  vs.  Apthorp,  12  Mass.  252  (1815),  the 
basis  of  all  subsequent  decisions. 

*  Western  Union  Telegraph  Co.  vs.  Massachusetts,  125  U.  S.  530. 

•  Nichols  vs.  Railroad  Co.,  42  Conn.  103. 

*  State  vs.  Insurance  Co.,  89  Ala.  335;  State  vs.  Railway  Co.,  37  Mo.  265. 
«  Fox's  Appeal,  112  Pa.  359;  Commonwealth  vs.  Standard  Oil  Co.,  101 

Pa.  119;  Phoenix  Iron  Co.  vs.  Conmionwealth,  59  Pa.  104;  Catawissa  Appeal, 
78  Pa.  59. 

•  101  Pa.  127. 

'  People  vs.  Home  Insurance  Co.,  92  N.  Y.  328;  Singer  Co.  vs.  Heppen- 
heimer,  25  Vroom,  439. 


THE  TAXATION  OF  CORPORATIONS 


235 


quent  case,  the  court  said,  although  indeed  obiter,  that  the  New 
York  tax  was  "  a  franchise  tax  in  the  nature  of  an  income  tax."  ^ 
Finally,  in  a  later  case,  the  tax  was  definitely  pronounced  to  be 
on  franchise,  the  court  holding  that  the  tax  was  not  upon  the 
capital  stock  nor  upon  any  bonds  of  the  United  States  com- 
posing a  part  of  that  stock;  but  that  reference  was  made  to 
the  capital  stock  and  dividends  only  for  the  purpose  of  deter- 
mining the  amount  of  the  tax  to  be  exacted  each  year.^ 

This  decision  may  be  defended  on  economic,  as  well  as  on 
legal,  grounds.  It  may  be  granted,  and  in  fact  it  is  difficult  to 
dispute  the  contention,  that  the  tax  is  in  one  sense  a  tax  on  capi- 
tal stock.  Nevertheless,  it  does  not  follow  that  the  tax  is  a  prop- 
erty tax;  for  from  the  economic  point  of  view  capital  stock  is 
not  necessarily  identical  with  the  property  of  a  corporation. 
In  the  first  place  there  is  the  question  of  the  market  or  par  value 
of  the  stock.  Some  of  the  commonwealths,  as  we  know,  tax 
corporations  on  the  amount,  i.e.  the  par  value,  of  the  capital 
stock.  Yet  manifestly,  where  the  market  value  of  the  stock 
may  be  double  or  half  the  par  value,  it  cannot  be  maintained 
that  the  latter  is  identical  with,  or  an  index  to,  the  value  of  the 
property.  In  no  sense,  therefore,  can  capital  stock  at  its  par 
value  be  declared  equivalent  to  the  whole  property.  Even  if 
we  take  the  market  value  of  the  stock,  we  are  not  in  a  much 
better  position,  for  many  of  our  corporations,  especially  rail- 
roads, are  created  on  the  proceeds  of  the  bonds.  In  such  cases, 
although  the  property  may  be  great,  the  profits  are  devoted 
mainly  to  meeting  the  interest  on  the  bonded  debt,  and  since 
there  may  be  no  dividends,  the  value  of  the  stock  may  be  very 
slight.  Yet  the  property  which  produces  these  profits  may  be 
enormous.  Evidently  the  capital  stock  and  the  whole  property 
are  not  identical.  But  we  may  go  still  farther.  Even  in  the  case 
of  corporations  without  a  bonded  debt,  but  whose  property  does 
not  pay  good  dividends,  the  capital  stock  at  its  market  value 
is  no  index  of  the  value  of  the  property.  Thus,  a  model-dwellings 
company  may  have  property  worth  a  million  dollars;  yet  if  it  is 
so  managed  as  to  pay  no  dividends,  the  stock  will  sell  in  the 
market  for  a  very  small  sum.  The  value  of  this  depreciated 
stock  is  evidently  not  the  same  as  that  of  the  company's  real 
property.    They  are  not  interchangeable  terms.    Hence,  from 

*  Or,  as  it  was  said  in  another  place,  "a  tax  upon  its  franchise  based  upon 
its  income."    Mercantile  Bank  vs.  New  York,  121  U.  S.  158, 160. 
a  Home  Insurance  Co.  vs.  State  of  New  York,  134  U.  S.  594. 


236 


ESSAYS  IN  TAXATION 


whatever  point  of  view  we  regard  it,  capital  stock  is  not  identical, 
economically  speaking,  with  the  total  corporate  property;  a  tax 
on  capital  stock  is  not  a  tax  on  the  entire  property. 

The  courts  of  New  Jersey,  New  York  and  the  United  States 
are  then  quite  right  in  their  decisions;  and  the  Pennsylvania 
cases  seem  to  be  incorrect  both  in  law  and  in  economics. 

The  third  case  in  which  the  question  of  a  franchise  tax  is 
of  importance  is  in  connection  with  the  subject  of  interstate 
commerce.  The  growth  of  the  interpretation  put  upon  the 
principle  that  no  state  may  levy  a  tax  interfering  with  interstate 
commerce  will  be  more  fully  discussed  hereafter.^  It  may  be 
stated  here,  however,  that  in  a  large  number  of  cases  it  has 
been  held  that  a  tax  on  the  franchise  of  a  domestic  corporation 
is  valid  even  though  the  value  of  the  franchise  is  measured  by 
the  gross  receipts,  a  part  of  which  are  derived  from  interstate 
commerce.2  Were  the  tax  not  a  franchise  tax,  it  might  be 
invalid  as  a  tax  on  interstate  business. 

It  will  be  seen  from  the  above  review  that  the  entire  treat- 
ment of  this  kind  of  a  franchise  tax  is  based  largely  on  a  legal 
fiction.  The  conception  is  legal,  not  economic.  It  was  de- 
vised by  the  legislatures  and  extended  by  the  courts  in  order 
to  evade  the  evil  results  of  the  general  property  tax.^  It  is 
remarkable  that  in  the  state  of  New  York,  where  the  common- 
wealth tax  on  capital  stock  is  held  to  be  a  franchise  tax,  the 
local  tax  on  capital  stock,  which  is  levied  in  almost  the  identical 
way,  is  held  to  be  a  property  tax.  In  the  local  tax  a  deduction 
must  be  allowed  for  any  non-taxable  property  in  which  the 
capital  may  be  invested;  in  the  state  tax  no  such  deduction 
is  permitted.^    Such  a  distinction  is  economically  incorrect, 

» Infra,  pp.  264  et  seq. 

2  State  Tax  on  Railway  Gross  Receipts,  15  Wall.  284;  Maine  vs.  Grand 
Trunk  R.  R.  Co.,  142  U.  S.  217;  People  vs.  Wemple,  117  N.  Y.  136,  and 
other  cases  cited  below. 

3  This  is  apparent  from  the  New  York  law  of  1866,  chap.  761,  which 
declared  the  privileges  and  franchises  of  savings  banks  to  be  personal  prop- 
erty, and  taxable  to  an  amount  not  exceeding  the  gross  sum  of  the  surplus 
earned.  In  Monroe  County  Savings  Bank  vs.  City  of  Rochester,  37  N.  Y. 
365,  the  law  was  upheld,  although  the  bank  had  a  portion  of  its  property 
invested  in  United  States  bonds.  The  court  held  that  since  the  tax  was 
upon  a  franchise  it  was  unimportant  in  what  manner  the  property  of  the  cor- 
poration was  invested.  "The  reference  to  property  is  made  only  to  ascer- 
tain the  value  of  the  thing  assessed." 

*  People  vs.  Barker,  139  N.  Y.  55;  People  vs.  Commissioners,  72  Hun, 
126;  People  vs.  Coleman,  126  N.  Y.  433. 


I      I'' 


THE  TAXATION  OF  CORPORATIONS 


237 


however  defensible  it  may  be  on  the  legal  ground  that  in  the 
one  case  we  are  dealing  with  a  tax  on  property  and  in  the  other 
with  a  tax  on  privilege.  Except  in  so  far  as  corporations  may 
be  made  to  pay  for  their  charters,  there  is  no  reason  why  they 
should  be  put  on  a  different  footing  from  joint-stock  companies 
or  other  associations.  The  ability  of  an  association  to  pay — its 
earning  power — is  not  changed  a  whit  by  the  simple  fact  of  in- 
corporation. The  privilege  of  Hmited  liability,  however  im- 
portant it  may  be  to  the  individual  stockholders  and  however 
great  the  amount  that  may  be  demanded  for  the  privilege  as  a 
condition  precedent  to  organization,  does  not  alter  the  taxable 
capacity  of  the  association  after  it  has  once  become  a  corpora- 
tion. If  the  corporate  franchise,  in  the  sense  of  the  privilege  of 
being  a  corporation,  itself  constituted  the  only  justification  of  a 
tax,  how  would  it  then  be  possible  to  tax  unincorporated  com- 
panies in  the  §ame  way?  And  yet  to  exempt  the  latter  would 
clearly  constitute  a  glaring  economic  inequality. 

The  value  of  the  franchise  from  the  economic  point  of  view 
consists  in  the  earning  capacity  of  the  corporation.  That  is 
the  real  basis  of  all  taxation  and  can  best  be  gauged  by  the 
amount  of  business  done.  It  will  be  remembered  that  the  court 
says:  "Whether  the  tax  upon  a  domestic  corporation  be  called 
a  tax  upon  franchise  or  upon  business  is  wholly  unimportant."  ^ 
We  may  go  farther  and  say  that  from  the  economic  standpoint 
it  is  wholly  immaterial  whether  the  tax  upon  any  corporation 
be  called  a  tax  on  franchise  or  a  tax  on  business.  In  an  economic 
sense  the  franchise  tax  means  nothing  at  all.  It  is  so  utterly  in- 
definite that  it  defies  exact  analysis.  However  valuable  it 
may  be  to  the  lawyer  in  the  effort  to  evade  certain  constitutional 
restrictions,  to  the  student  of  the  science  of  finance.it  is  a  useless 
conception. 

If  we  sum  up  the  above  discussion  as  to  the  two  kinds  of 
franchise  tax  which  we  have  been  studying — the  franchise  tax 
as  a  property  tax  and  the  franchise  tax  as  a  non-property  tax — 
we  are  in  a  position  to  gauge  its  real  value.  The  first  kind  of  a 
franchise  tax,  as  we  now  know,  was  devised  in  order  to  fit  a 
concept  based  primarily  upon  earnings  or  income  into  a  system 
of  taxation  based  on  property  or  capitalized  income.  The  second 
kind  of  a  franchise  tax  was  devised,  as  we  have  seen,  to  over- 
come the  still  remaining  difficulties  of  a  property  tax.  The 
objection  to  the  first  kind  of  a  franchise  tax  is  that  as  a  property 

» 96  N.  Y.  396. 


238 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


239 


HI 


tax  it  is  a  mere  piece  of  guess  work,  leading  to  arbitrariness  and 
furnishing  no  opportunity  for  effective  redress  on  the  part  of 
the  taxpayer.  The  objection  to  the  second  kind  of  a  franchise 
tax  is  that  it  is  a  mere  makeshift  or  legal  subterfuge.  Both 
kinds  of  franchise  taxes  furnish  eloquent  testimony  to  the 
shortcomings  of  a  tax  system  where  the  criterion  of  ability 
to  pay  is  still  made  to  reside  in  property  rather  than  in  product 
or  income.  For  all  the  manifold  comphcations  and  litigations 
that  attend  the  American  franchise  tax  are  unknown  elsewhere 
in  the  world  where  the  general  test  of  faculty  in  taxation  is 
considered  to  be  income  rather  than  property.  The  problem 
of  the  franchise  tax  is  a  part  of  the  problem  of  the  general 
property  tax;  if  we  ever  shake  off  the  incubus  of  the  general 
property  tax  theory,  as  we  are  bound  to  do  in  the  not  distant 
future,  the  entire  problem,  and  the  conception  itself,  of  the 
franchise  will  disappear  from  the  realm  of  taxation. 

II.  Economic  Theory 

Let  us  therefore  leave  this  whole  subject  of  franchise  taxation 
and  attempt  to  analyze  the  economic  principles  underlying 
the  taxes  actually  in  vogue,  irrespective  of  the  question  whether 
they  are  called  franchise  taxes.  It  will  be  best  to  take  them  up 
in  the  order  adduced  above.^ 

The  general  property  tax,  or  the  taxation  of  the  corporate 
realty  plus  its  visible  and  invisible  personalty  at  its  actual  value, 
assessed  piecemeal  by  the  local  assessors  as  in  the  case  of  in- 
dividuals. It  will  not  be  necessary  to  show  the  inadequacy  of 
this  primitive  plan;  all  the  actual  reforms  are  moving  away 
from  it.  With  the  variation  of  this  system  known  as  the  ad 
valorem  tax,  assessed  by  a  state  board  under  the  unit  plan,  we 
shall  deal  below.  But  so  far  as  the  general  property  tax  with 
local  piecemeal  assessment  is  concerned,  we  may  conclude  with 
the  railroad  tax  commission  of  1879,  that  as  a  system  it  is  open 
to  almost  every  conceivable  objection.- 

The  cost  of  the  property.  As  a  basis  for  taxation  this  is  even 
less  defensible  than  the  value  of  the  property.  For  no  one 
would  assert  that  the  original  cost  of  corporate  property  bears 
any  necessary  relation  to  the  present  value,  much  less  to  its 

» Supra,  pp.  219-220. 

« Taxation  of  Railroads  and  Railroad  Securities,  by  C.  F.  Adams,  W.  B. 
WiUiams  and  J.  H.  Oberly  (1880),  p.  8. 


present  earning  capacity.  This  method  is  so  obviously  unjust 
as  to  deserve  no  further  mention. 

The  capital  stock  at  its  market  value.  This  plan  is  open  to 
several  vital  objections.  The  idea  is  that  the  market  value 
of  the  stock  will  be  practically  equivalent  to  the  value  of  the 
property,  or,  as  it  is  put  by  some  of  our  state  courts,  that 
the  entire  property  of  a  corporation  is  identical  with  its  stock. 
As  has  already  been  observed,  heavily  bonded  corporations 
would  in  this  way  entirely  escape  taxation;  because  in  such 
cases — and  they  are  the  great  majority — the  capital  stock 
alone  would  not  represent  the  value  of  the  property.  Secondly, 
even  in  the  case  of  corporations  without  any  bonded  debt, 
the  tax  is  unjust,  because  it  does  not  necessarily  bear  any  rela- 
tion to  the  earning  capacity.  If  a  company  without  bonded 
debt  pays  dividends,  the  value  of  the  stock  is  indeed  a  fair  index 
to  earning  capacity;  its  value  would  represent  the  capitalized 
earnings.  But  if  there  are  no  dividends,  the  value  of  the  capital 
stock  is  wholly  uncertain  and  largely  speculative,  depending 
on  the  manipulations  of  the  stock  exchange.  It  frequently 
happens  that  non-dividend-paying  stock  fluctuates  in  value 
from  thirty  to  fifty  per  cent  within  one  year.  A  standard  of 
taxation  which  in  such  large  classes  of  cases  bears  no  propor- 
tion to  the  earning  capacity  or  productiveness  of  the  property 
clearly  cannot  be  successfully  defended.  We  can  again  agree 
with  the  railroad  tax  commission  in  their  conclusion  that  the 
tax  on  the  value  of  the  capital  stock  is  "clumsy  and  devoid 
of  scientific  merit,"  that  it  "would  admit  of  evasions  in  a  most 
obvious  way,"  and  that  "it  is  impossible  of  any  general  appU- 
cation."  ^ 

The  New  York  statute  which  governs  the  taxation  of  cor- 
porations for  local  purposes  requires  the  capital  stock  to  be 
assessed  "at  its  actual  value  in  cash."  In  determining  the 
"actual"  value,  the  assessors  may  take  "book  value,"  i.e.  a 
value  obtained  by  estimating  the  assets  separately  and  deduct- 
ing from  the  aggregate  the  total  amount  of  the  liabilities, 
actual  or  contingent.^  The  latter  method  is  employed  when  the 
market  value  of  the  stock  is  fictitious  or  artificially  inflated,  but 
in  principle  is  open  to  precisely  the  same  criticism  as  the  other 

*  Report,  etc.,  p.  7.  Cf  the  Report  on  the  Valuation  and  Taxation  of 
Railroads,  to  the  Pennsylvania  Tax  Conference,  1894,  written  by  Mr. 
Joseph  D.  Weeks. 

2 107  N.  Y.  541. 


I 


240 


ESSAYS  IN  TAXATION 


method.  In  fact,  the  objections  are  rather  stronger;  for,  whereas 
in  the  case  of  the  tax  on  capital  stock  according  to  market 
value  the  bonded  indebtedness  is  not  taxed  at  all,  in  this  case 
the  bonded  indebtedness  is  actually  deducted.  Under  the 
New  York  law  it  has  been  decided  that  ''capital  stock"  does 
not  necessarily  mean  share  stock,  but  the  capital  owned,  the 
fund  required  to  be  paid  in  and  kept  intact  as  the  basis  of  the 
business  enterprise.  When  the  capital  is  undisclosed,  the  assessor 
may  consider  the  market  value  of  the  shares  as  an  aid  in  dis- 
covering the  capital,  but  not  as  the  thing  to  be  valued  and 
assessed.^  In  the  state  franchise  tax,  however,  whenever  the 
law  requires  the  "  intrinsic  or  actual  value  "  of  the  stock  to  be 
ascertained,  it  has  been  held  that  book  value  does  not  govern 
the  valuation,  but  that  the  good  will  is  also  to  be  included.^ 

According  to  the  Pennsylvania  law  of  1891  the  capital  stock 

on  which  the  tax  is  assessed  is  to  be  appraised  "at  its  actual 

value  in  cash,  not  less  however,  than  the  average  price  which 

said  stock  sold  for  during  said  year  and  not  less  than  the  price 

indicated  or  measure  by  net  earnings,  or  by  the  amount  of  profits 

made  and  either  declared  in  dividends  or  carried  into  surplus 

or  sinking  funds."    This  has  led  to  much  litigation.    It  has  been 

decided,  for  instance,  that  the  price  at.  which  the  shares  sell 

in  the  market  is  not  conclusive  ;3  and  in  a  more  general  way 

that  the  actual  value  in  cash  is  to  be  determined  by  "  considenng 

the  value  of  the  tangible  property,  the  amount  of  its  busmess, 

the  rate  of  dividends  declared,  and  the  extent  and  value  of  its 

good  will,  franchises,  and  privileges,  as  indicated  by  the  evidence 

bearing  upon  those  subjects  at  that  particular  time.^     The 

result  is  that  in  practice  the  taxation  of  capital  stock,  by  such 

a  method  of  appraisal,  does  not  differ  much  from  the  ad  valorem 

system  mentioned  below. 

The  cajrital  stock  at  its  par  value.  This  method  is  open  to  all 
the  objections  of  the  preceding  and  to  many  more  in  addition. 
Moreover,  it  is  peculiarly  Uable  to  evasion.  For  example,  in 
New  York  it  was  a  common  practice,  before  the  recent  reduction 
of  the  rate  to  a  minimum,  for  corporations  to  evade  the  organiza- 

1  People  vs.  Coleman,  126  N.  Y.  433,  distinguishing  many  preceding  cases. 
See  also  People  vs.  Commissioners,  72  Hun,  120  (1S94).  ,  „      , 

2  People  ex  rel.  J.  B.  Co.  vs.  Roberts,  37  App.  Div.  1  (1899);  and  People 
ex  rel  Johnson  Co.  vs.  Roberts,  159  N.  Y.  70  (1899). 

>  Com.  vs.  Philadelphia  Co.,  164  Pa.  284  (1894). 

*Com  vs.  John  W.  Haney  Co.,  Lim.,  1  Dauph.  Co.  Rep.  184  (1895); 
cf.  Com.  vs.  Del,  Susq.  &  S.  R.  R.  Co.,  165  Pa.  44  (1894). 


THE  TAXATION  OF  CORPORATIONS 


241 


tion  tax  by  issuing  a  nominally  small  capital,  but  selling  it  to 
the  stockholders  at  a  premium  of  several  hundred  per  cent; 
the  market  value  of  the  stock  thus  being  many  times  the 
par  value.  The  sole  recommendation  of  this  plan  is  the  facility 
of  fixing  a  basis  for  assessment;  but  this  does  not  compensate  for 
its  obvious  defects.  The  par  value  of  stock  is  no  gauge  of  either 
the  real  worth  of  the  property  or  its  earning  capacity. 

The  capital  stock  plus  the  bonded  debt  at  the  market  value. 
The  justification  for  adding  to  the  value  of  the  stock  the  value 
of  what  the  company  owes,  in  the  shape  of  its  funded  debt, 
is  the  fact  that  the  indebtedness  makes  the  stock  worth  just  so 
much  less.  The  sum  of  the  two  elements  is  a  better  index  to  the 
value  of  the  property  than  the  capital  stock  alone.  This  method, 
while  preferable  to  any  that  has  hitherto  been  discussed,  is  yet 
not  entirely  free  from  objections.  The  proceeds  of  the  tax  will 
accrue  not  to  the  state  of  the  owner's  residence,  but  to  the 
state  where  the  corporate  property  is  situated.  Secondly, 
the  market  value  of  bonds  depends  not  only  on  the  rate  of 
interest  but  also  on  the  life  of  the  security.  Two  companies  may 
have  raised  exactly  the  same  amount  from  the  sale  of  6%  bonds, 
and  yet  at  any  given  time  the  bonds  of  the  one  corporation 
may  have  a  long  time  to  run  and  those  of  the  other  corporation 
onh-^  a  short  time.  If  the  normal  rate  of  interest  has  fallen 
to  let  us  say  4%,  the  market  value  of  the  bonds  of  the  first 
corporation  will  be  far  higher  than  that  of  the  bonds  of  the 
second  corporation.  Yet  the  discrepancy  represents  not  any 
difference  in  the  value  of  the  respective  corporate  properties, 
but  simply  the  difference  in  the  amortization  quota  of  the 
two  classes  of  bonds.  ^  Thirdly,  when  the  tax  is  on  bonds  as 
well  as  on  stock  it  will  be  inadequate,  because  applicable  only 
to  the  bonds  owned  by  residents  of  the  state.  If  the  tax  is, 
however,  levied  not  on  the  bonds,  but  on  a  valuation  equal  to 
the  stock  plus  bonds,  this  objection  may  be  obviated.  Both 
these  points  will  be  discussed  more  fully  below.  Fourthly, 
in  all  those  cases  where  the  corporation  pays  no  dividends  and 
its  stock  nevertheless  possesses  a  speculative  value,  the  tax, 
for  the  reasons  adduced  above,  will  not  necessarily  bear  any 

1  This  inequality  will  in  some  cases  be  partly  compensated  by  a  change 
in  the  value  of  the  stock.  Although  the  bonds  that  mature  earher  are  worth 
less,  the  stocks  of  the  "short-term"  companies  are  apt  to  be  worth  more 
because  of  the  ability  of  the  corporation  to  refinance  on  more  favorable 
terms. 


242 


ESSAYS  IN  TAXATION 


relation  to  the  earning  capacity  of  the  company.  In  short,  while 
this  method  is  far  better  than  the  taxation  of  capital  stock, 
it  does  not  avoid  all  the  objections  that  have  been  urged  against 

the  latter.  . 

There  remain  thus  only  the  taxes  on  earnings,  on  business, 

on  dividends  and  on  profits. 

The  gross  earnings.    This  tax  was  the  one  recommended  by 
the  railroad  tax  commission.     It  possesses  many  undeniable 
advantages.    It  is  certain,  easily  ascertained  and  not  susceptible 
of  evasion.    But  it  has  one  serious  defect;— it  is  not  propor- 
tional to  the  real  earning  capacity,  it  takes  no  account  of  the 
original  cost,  nor  does  it  pay  any  regard  to  the  current  expenses, 
which  may  be  necessary  and  just.     For  example,  when  the 
cost  of  building  a  railroad  is  great,  its  gross  earnings  must  be 
correspondingly  large  in  order  to  enable  its  owners  to  realize 
any  fair  return  on  the  investment.     A  tax  on  gross  earnings 
does  not  recognize  this  distinction.    It  discriminates  unfairly 
between  companies,  and  makes  a  line  built  at  great  expense 
and  with  great  risk  pay  a  penalty  for  the  enterprise  of  its  con- 
structors.    Again,  a  gross  earnings  tax  takes  no  account  of 
expenses.    Of  two  corporations  which  have  equally  large  gross 
receipts,  one  may  be  in  a  naturally  disadvantageous  position 
which  unduly  increases  the  cost  of  operation  or  management. 
Clearly  its  ability  to  pay  is  not  so  great  as  that  of  its  rival  in 
possession  of  natural  advantages.    Above  all,  the  gross  earnings 
tax  makes  no  allowance  for  good  management.    If  a  corporation 
is  managed  with  such  ability  that  its  business  increases  greatly, 
this  will  ordinarily  mean  a  great  increase  in  gross  receipts; 
while,  on  the  other  hand,  the  net  receipts  or  profits,  although 
also  larger,  will  almost  surely  increase  not  indeed  in  a  smaller 
ratio,  but  to  a  smaller  actual  extent,  than  gross  receipts.    For 
with  a  larger  business  there  come  greater  expenses.  The  prospect 
of  increased  net  receipts  is  of  course  the  stimulus  to  activity 
on  the  part  of  the  owner;  but  if  the  tax  is  imposed  on  gross 
•  receipts,  that  stimulus  will  be  pro  tanto  weakened.     Thus  a 
tax  on  gross  receipts  is  really  a  tax  on  enterprise  and  foresight, 
and  a  premium  on  supineness  or  inactivity.     In  short,  the 
gross  receipts  tax  is  like  the  old  tithe,  the  most  primitive  of 

all  land  taxes. 

These  defects  in  the  proportional  earnings  tax  are  so  ap- 
parent that  several  commonwealths,  as  we  know,  have  intro- 
duced, in  the  case  of  railroads  at  least,  the  graded  gross  earnings 


THE  TAXATION  OF  CORPORATIONS 


243 


tax,  the  rate  per  cent  increasing  with  the  earnings.  But  this 
system  removes  the  objection  only  in  part;  for  the  graduation 
takes  place  only  up  to  a  certain  point.  Above  all,  there  is  no 
guarantee  that  the  increase  of  net  receipts  will  correspond  to 
the  increase  of  the  gross  receipts.  There  is  no  necessary  con- 
nection between  them.  A  corporation  with  gross  receipts  of 
five  thousand  dollars  per  mile  may  have  actually  less  net  receipts 
than  one  with  four  thousand  dollars  per  mile.  In  such  a  case 
a  graded  earnings  tax  would  intensify  the  disadvantages  of 
the  first  line  and  augment  the  injustice.  To  tax  gross  earnings 
is,  therefore,  in  theory  at  least  essentially  a  slip-shod  method. 
In  practice,  however,  as  we  shall  see,  its  administrative  advan- 
tages are  so  marked  as  to  render  the  gross  earnings  tax  under 
certain  circumstances  desirable. 

The  business  transacted.  This  tax,  while  closely  analogous 
to  the  gross  earnings  tax,  does  not  possess  all  its  advantages. 
The  business  may  be  large  but  not  lucrative.  An  extensive 
business  does  not  mean  even  proportionally  extensive  gross 
earnings.  The  business  transacted  is  an  exceedingly  rough 
way  of  ascertaining  the  prosperity  of  a  corporation.  It  affords 
no  accurate  test  of  profits,  and  fails  to  take  account  of  the 
personal  equation  which  may  make  all  the  difference  between 
good  and  bad  management.  Clearly,  the  tax  on  business  is  but 
a  clumsy  device. 

The  dividends  or  the  capital  stock  according  to  dividends. 
Economically  speaking  these  taxes  are  the  same;  but  from 
the  legal  point  of  view,  at  least  according  to  the  opinion  of 
the  Supreme  Court,  there  is  a  decided  difference.  The  dis- 
tinction is  brought  out  in  connection  with  the  subject  of  extra- 
territoriality, and  will  be  fully  discussed  below.  We  are  here 
dealing  only  with  the  economic  problem. 

The  dividends  tax,  it  may  be  said,  is  good  so  far  as  it  goes; 
but  it  does  not  go  far  enough.  It  is  indeed  true  that  some 
of  the  objections  are  slight.  Thus  it  has  been  contended  that 
this  tax  fails  to  reach  the  profits  which  are  not  divided  but 
which  are  simply  put  into  a  reserve  fund;  and  some  common- 
wealths have  even  sought  to  obviate  the  supposed  difficulty  by 
providing  that  the  tax  should  apply  to  the  dividends,  whether 
declared  or  merely  earned  and  not  divided.  This  objection, 
however,  is  not  of  great  importance;  for  even  if  the  undivided 
earnings  are  not  taxed,  they  go  into  the  reserve  or  surplus  fund; 
and  as  this  increases  the  corporate  capital,  it  must  in  the  long 


ESSAYS  IN   TAXATION 


THE  TAXATION  OF  CORPORATIONS 


245 


run  lead  to  increased  earnings  on  the  larger  capital.  Since 
the  surplus  cannot  be  increased  indefinitely,  it  will  ultimately 
find  its  way  to  the  shareholders  as  dividends,  and  thus  become 

liable  to  the  tax. 

Another  objection  which  might  be  urged  is  that  a  corpora- 
tion may  devote  a  portion  of  its  earnings  to  new  construction 
or  to  new  equipment.  This  expense  may  be  defrayed  out  of 
profits,  instead  of  from  the  capital  or  construction  fund.  The 
dividends  in  such  a  case,  it  might  be  said,  do  not  represent  the 
actual  earning  capacity  of  the  enterprise.  While  this  is  true 
temporarily,  the  improvements  made  by  the  corporation 
necessarily  enhance  the  value  of  the  property  and  ultimately 
lead  to  increased  dividends,  so  that  in  the  long  run  a  tax  on 
dividends  would  still  reach  the  corporation. 

The  real  objection  to  the  dividends  tax  is  of  quite  a  different 
character.    It  is  inadequate  when  applied  to  those  corpora- 
tions which  have  bonded  indebtedness.     Thus  one  corporation 
having  no  bonds  may  earn  enough  to  pay  dividends  of  five 
per  cent  on  its  stock,  while  another,  with  the  same  earnings, 
may  have  devoted  half  to  the  pajonent  of  interest  on  bonds, 
and  only  half  to  the  payment  of  dividends.    A  tax  on  dividends, 
while  nominally  just,  would  be  actually  most  unjust,  for  one 
corporation  would  pay  just  twice  as  much  as  the  other.    The 
objection  has  been  recognized  in  American  legislation,  but  only 
once.     The  United  States  internal  revenue  law  of  1864  pro- 
vided for  a  five  per  cent  tax  (raised  from  three  per  cent  in 
1862),  which,  in  the  case  of  railroads,  canals,  turnpike,  naviga- 
tion and  slackwater  companies,  was  imposed  on  all  dividends, 
as  well  as  on  all  coupons  or  on  all  interest,  on  evidences  of 
indebtedness  and  on  all  profits  carried  to  the  account  of  any 
fund.    In  the  case  of  those  companies  which  were  not  presumed 
to  have  any  bonded  debt,  like  banks,  trust  companies,  savings 
institutions  and  insurance  companies,  the  tax  was  imposed 
only   on   dividends   and   surplus.     The  federal   law,   indeed, 
violated  strict  consistency  in  imposing  a  gross  earnings  tax 
also  on  transportation  and  on  certain  insurance  companies; 
but  the  correct  implication  in  the  law  was  the  inadequacy  of 
a  tax  on  dividends  alone.    On  the  other  hand,  the  federal  law 
of  1909  imposing  an  excise  tax  of  1%  on  the  "net  income" 
of  corporations  is  open  to  serious  objections.     For  it  permits 
among  the  deductions  from  gross  income  all  interest  actually 
paid  in  the  year  on  bonded  or  other  indebtedness  up  to  an 


amount  of  debt  equal  to  the  paid  up  capital.  That  is,  since 
interest  on  the  bonds  is  not  taxable,  the  tax  is  virtually  levied 
on  dividends,  or  at  all  events  on  the  sums  available  for  divi- 
dends. In  fine  the  objections  to  the  dividends  tax  are  closely 
analogous  to  those  which  we  found  in  the  capital  stock  tax  as 
compared  with  the  tax  on  stock  plus  debt.  Its  great  defect 
is  that  it  reaches  only  a  part  of  the  corporate  earning  capac- 
ity. 

We  thus  come  finally  to  the  tax  on  net  earnings,  or  rather 
on  net  receipts,  profits  or  income.  This  is  the  most  logical 
form  of  corporate  taxation.  The  tax  is  not,  like  the  gross 
earnings  tax,  unequal  in  its  operation.  It  holds  out  no  induce- 
ment, like  the  general  property  tax,  to  check  improvements. 
It  is  just;  it  is  simple;  it  is  perfectly  proportional  to  productive 
capacity.  In  short,  it  satisfies  the  requirements  of  a  scientific 
system. 

Several  objections,  however,  might  be  raised  to  a  tax  on  net 
receipts.  One  is  that  the  accounts  may  be  *' cooked  "  by  paying 
unduly  large  salaries  to  the  officers;  that  is,  the  profits  may  be 
divided  as  nominal  expenses,  thereby  leaving  very  insignificant 
net  receipts  or  none  at  all.  This  objection,  however,  would  not 
apply  at  all  to  the  vast  majority  of  corporations,  whose  stock  or 
bonds  are  held  by  outside  parties,  that  will  not  consent  to  see 
their  dividends  or  interest  curtailed  by  any  practices  of  this 
nature.  The  danger  can  be  real  only  in  respect  to  the  few  cor- 
porations in  which  the  stock  is  owned  entirely  by  the  managers. 
But  these  are  chiefly  manufacturing  corporations,  which,  as 
we  know,  are  usually  exempted  from  the  general  corporation 
tax.  Even  here,  however,  the  danger  is  not  very  great.  We 
hear  of  no  complaints  on  this  score  in  the  American  common- 
wealths where  the  net  receipts  tax  prevails;  and  in  Europe, 
where  this  method  of  taxation  is  well-nigh  universal,  the  objec- 
tion has  never  been  raised.  It  may  thus  be  pronounced  of  little 
importance. 

Secondly,  it  may  be  contended  that  the  tax  is  impracticable 
in  the  case  of  great  railroad  corporations  which,  having  leased 
lines  in  other  states,  are  interested  in  so  manipulating  the 
traffic  that  the  heavily  mortgaged  leased  lines  will  earn  little  or 
nothing  above  fixed  charges.  Such  cases  are  very  common. 
The  commonwealths  in  which  such  leased  lines  are  situated  will, 
it  is  argued,  be  robbed  of  the  whole  benefit  of  the  tax;  since  the 
proceeds  accrue  to  the  state  of  the  parent  company.    In  reality, 


246 


ESSAYS  IN  TAXATION 


this  objection  arises  simply  from  a  quibble  about  words.  Of 
course  net  receipts  must  be  strictly  defined.  The  logical  basis 
of  corporate  taxation  is  the  total  annual  revenue  from  all  sources 
minus  all  actual  expenditures  except  interest  and  taxes.  The 
reason  for  not  deducting  fixed  charges,  ix.  interest  on  the  bonds, 
is  the  same  as  that  which  leads  some  of  the  states  to  levy  the 
railroad  tax  on  capital  plus  debt,  and  which  made  the  federal 
government  in  1864  tax  coupons  as  well  as  dividends.  Both 
together  represent  earning  capacity.^  Although  the  interest 
on  the  funded  debt  is  known  by  the  name  of  fixed  charges,  it 
is  really  part  of  the  profits  which,  in  the  absence  of  funded  debt, 
would  go  to  the  shareholders  as  dividends.  It  would  obviously 
be  suicidal  so  to  frame  the  definition  of  net  receipts  as  to  ex- 
clude this  interest  on  bonds.  Net  receipts  of  a  corporation  mean 
gross  receipts  minus  actual  current  expenses.  Any  other  defini- 
tion would  confuse  the  whole  conception. 

In  several  commonwealths  some  very  dubious  and  arbitrary 
distinctions  have  been  attempted.  The  Minnesota  courts  have 
held  that  "earnings"  means  only  receipts  from  operation.^ 
Under  the  New  York  law  it  has  been  held  that  "  income  "  means 
gross  income,  and  that  "profits"  means  gross  profits,  not  clear 
profits;  3  but  this  decision  was  owing  to  some  pecuUarities  of  the 
statutory  phraseology.  From  the  standpoint  of  the  science  of 
finance  we  understand  by  "income,"  net  income,  and  by  "prof- 
its," only  net  profits.  So  in  Pennsylvania  and  Alabama  it  has 
been  held  that  income,  gains  or  net  earnings  means  the  whole 
product  of  the  business,  deducting  nothing  but  expenses.* 
In  Pennsylvania  it  has  been  well  settled  that  net  earnings  are 
the  excess  of  gross  earnings  over  the  expenditures  incurred  in 
producing  them  and  the  amount  incurred  in  necessary  repairs, 
but  not  including  the  amount  expended  in  enlarging  or  ex- 
tending the  works.^  The  Thurman  law,  indeed,  which  regulated 
the  relations  of  the  federal  government  to  the  Pacific  railroads, 
defined  net  earnings  in  a  different  way,  viz.,  as  the  gross  earnings, 

»  Cf.  supra,  pp.  106-107. 

2  State  t's.  Railroad  Co.,  30  Minn.  311.  «  •  r 

« People  vs.  Supervisors  of  Niagara,  4  Hill,  20;  People  vs.  Supervisors  of 

New  York,  18  Wend.  605.  .   ..       ,    ^  t. 

*  Commonwealth  vs.  Pa.  Gas  Coal  Co.,  62  Pa.  241  (1869);  Board  of  Rev- 
enue  vs.  Gas  Light  Co.,  64  Ala.  269.    In  the  case  of  mines,  "net  proceeds 
have  been  defined;  Montana  Code,  §  1791. 

5  Com.  vs.  Minersville  Water  Co.,  13  Pa.  C.  C.  17  (1893);  and  Com.  vs. 
Sharon  Coal  Co.,  164  Pa.  284  (1894). 


THE  TAXATION  OF  CORPORATIONS 


247 


deducting  "the  necessary  expenses  actually  paid  within  the 
year  in  operating  the  lines  and  keeping  the  same  in  a  state  of  re- 
pair," and  also  deducting  "the  sums  paid  by  them  in  discharge 
of  interest  on  their  first  mortgage  bonds,"  but  "excluding  all 
sums  paid  for  interest  on  any  other  portion  of  their  indebted- 
ness." ^  The  explanation  of  this  arbitrary  definition  lies  not  in 
any  economic  principle  but  in  a  particular  legislative  provision 
whereby  the  first  mortgage  bonds  were  given  precedence  over 
the  government  liens.  The  Supreme  Court  has  held  that  "net 
earnings"  as  here  used  exclude  expenditures  for  new  construc- 
tion and  new  equipment.-  In  Virginia  the  taxable  net  income  of 
corporations  was  formerly  ascertained  by  "deducting  from  gross 
receipts  the  costs  of  operation,  repairs,  and  interest  on  indebt- 
edness." So  also  by  the  federal  law  of  1909  the  excise  tax  is 
vitually  levied  only  on  corporate  dividends;  but  this,  as  we  have 
seen,  is  economically  incorrect.  Interest  on  bonds  should  not  be 
exempted. 

If  it  be  desired  to  obtain  in  the  case  of  railroad  companies  a 
more  exact  definition  of  net  receipts  or  income,  the  following 
would  be  a  sound  method  of  procedure:  Gross  receipts  consist 
of  all  earnings  from  transportation  of  freight  and  passengers, 
receipts  from  bonds  and  stocks  owned,  rents  of  property  and  all 
miscellaneous  receipts  from  ancillary  business  enterprises  or 
otherwise.  From  these  aggregate  gross  receipts  we  should 
deduct  what  are  classified  by  the  Interstate  Commerce  Com- 
mission as  operating  expenses.^  No  deduction  should  be  made 
for  fixed  charges,  i.e.  for  taxes  or  for  interest  on  the  debt,  or  for 
the  amount  used  in  new  construction,  in  betterments,  in  invest- 
ments, in  new  equipment,  or  for  any  of  the  expenditures  that 
find  their  way  into  profit  and  loss  account. 

The  method  here  suggested  would  lead  to  the  abolition  of 
one  of  the  serious  abuses  of  American  railway  management — 
that  of  putting  all  possible  expenses  into  the  construction  ac- 
count.    The  railways,  for  example,  formerly  often  failed  to 

*  Act  of  May  7, 1878, 45th  Cong.,  2d  Sess.,  chap.  96,  sec.  1. 

» Union  Pacific  R.  R.  Co.  vs.  United  States,  99  U.  S.  419. 

'  The  operating  expenses  which  it  is  permissible  to  deduct  from  the  gross 
receipts  are  defined  as  "maintenance  of  way  and  structures"  including: 
"repairs  of  roadway  and  renewal  of  rails  and  ties;  repairs  and  renewal  of 
bridges  and  other  structures;  maintenance  of  equipment;  conducting  trans- 
portation, including:  salaries  and  wages  in  the  operating  department, 
supplies,  car  mileage,  switching  charges,  damage  for  injuries,  advertising, 
outside  agencies  and  commissions;  and  general  expenses." 


248 


ESSAYS  IN   TAXATION 


THE  TAXATION  OF  CORPORATIONS 


249 


I 


charge  the  maintenance  and  repair  of  their  rolling  stock  to  cur- 
rent expenses.  When  the  equipment  has  become  unserviceable, 
new  stock  is  bought  and  charged  to  the  construction  or  to  the 
profit  and  loss  account.  In  the  meantime  the  nominal  earnings 
of  the  railway  seem  large,  and  the  managers  reap  whatever 
temporary  benefit  they  may  desire.  The  taxation  of  net  profits 
in  the  sense  that  has  been  indicated  would  tend  to  check  this 
practice,  since  deductions  would  be  allowed  for  maintenance, 
but  not  for  new  equipment.  A  tax  on  net  receipts,  thus,  prop- 
erly defined,  would  possess  not  only  a  financial,  but  also  a  wider 
economic  advantage. 

The  federal  corporation  tax  of  1909  gives  a  definition  of  net 
income  which  is  clear  and  satisfactory,  with  the  exception,  as 
noted  above,  that  it  permits  deductions  for  taxes  and  for  inter- 
est on  debt.  Omitting  these  two  points,  the  definition  is  as 
follows: 

"Such  net  income  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  the  income  received  within  the  year  from  all  sources:  (First) 
All  the  ordinary  and  necessary  expenses  actually  paid  within  the  year 
out  of  income  in  the  maintenance  and  operation  of  its  business  and 
properties,  including  all  charges  such  as  rentals  or  franchise  payments, 
required  to  be  made  as  a  condition  to  the  continued  use  or  possession 
of  property;  (second)  all  losses  actually  sustained  within  the  year  and 
not  compensated  by  insurance  or  othenvise,  including  a  reasonable 
allowance  for  depreciation  of  property,  if  any,  and  in  the  case  of  in- 
surance companies,  the  sums  other  than  dividends  paid  within  the 
year  on  poHcy  and  annuity  contracts  and  net  addition,  if  any,  required 
by  law  to  be  made  within  the  year  to  reserve  funds :  [(third)  and  (fourth) 
omitted  as  representing  taxes  and  interest] ;  (fifth)  all  amounts  received 
within  the  year  as  di\'idends  upon  stock  of  other  corporations,  etc., 
subject  to  the  tax  herein  imposed." » 

So  far  as  intra-state  carriers  are  concerned,  most  of  the  state 
commissions  now  follow  the  system  prescribed  by  the  federal 

*  In  an  interesting  memorandum  by  a  number  of  prominent  accountants 
attention  is  called  to  the  fact  that  it  would  have  been  far  more  in  consonance 
with  modern  accounting  methods  to  substitute  for  the  words  "expenses 
actually  paid"  the  words  "expenses  actually  incurred";  and  for  the  words 
"losses  actually  sustained"  the  words  "losses  actually  ascertained".  See 
The  Corporation  Tax  Law  of  1909.  A  Letter  to  the  Members  of  the  American 
Association  of  Public  Accountants  together  mth  Copies  of  Correspondence  with 
the  Attorney  General.    New  York,  1909. 


commission.  As  to  other  pubhc-service  corporations  less  prog- 
ress has  been  made,  although  the  pubHc-utility  commissions 
in  some  important  states  like  New  York,  New  Jersey  and  Wis- 
consin have  laid  down  equally  minute  rules  applicable  to  these. 
With  every  year,  therefore,  the  objections  to  the  net  earnings 
rule  based  on  inabiUty  to  define  net  earnings  are  losing 
force. 

A  final  objection,  occasionally  urged,  is  that  the  net  earnings 
tax  is  inadequate  for  the  reason  that  corporations  sometimes 
have  no  net  earnings  while  the  government  always  needs  a 
revenue.  This  objection,  however,  is  without  much  weight. 
For  if  the  accounts  are  carefully  prescribed,  the  absence  of  net 
earnings  will  be  far  less  frequent  than  is  commonly  feared;  and 
if  it  nevertheless  happens  that  in  any  particular  year  a  given 
corporation  actually  earns  nothing,  there  is  no  reason  why  it 
should  be  called  upon  to  pay  the  tax.  If  the  rule — no  net  earn- 
ings taxation  because  of  the  possibility  of  no  net  earnings — were 
strictly  followed,  it  would  render  impossible  any  general  income 
tax  on  individuals;  and  yet,  as  we  know,  the  tendency  through- 
out the  world  is  towards  an  income  tax.  The  fact  that  individ- 
uals here  and  there  fail  to  secure  an  income  from  their  business 
or  otherwise  is  not  considered  any  valid  objection  to  the  imposi- 
tion of  an  income  tax  in  general.  Corporations,  Hke  individuals, 
normally  make  profits;  and  where  losses  are  incurred  by  some, 
they  are  more  than  compensated  by  the  profits  of  others.  The 
public  revenue  continues  because  of  the  balance  of  profit  mak 
ers.  Moreover  it  must  not  be  forgotten  that  under  a  proper 
system  of  taxation,  a  corporation  even  without  any  net  earn- 
ings would  still  be  subject  to  taxation  on  its  real  estate  for  local 
purposes.  But  to  tax  a  corporation  for  state  purposes  on  its 
property  when  the  property  yields  nothing,  or  on  its  gross 
receipts  when  the  receipts  are  all  swallowed  up  by  necessary 
expenses,  is  assuredly  not  to  be  defended  on  any  principle  of 
equity,  as  a  permanent  rule.  Above  all,  however,  if  in  the 
exceptional  case  of  no  net  earnings  it  is  still  desired  to  secure 
a  revenue  it  is  easy  to  adopt  the  simple  solution  of  the  problem, 
as  practised  in  Austria.^  The  tax  there  is  levied  on  net  earnings, 
but  in  no  case  is  permitted  to  be  less  than  a  certain  percentage 
of  the  corporate  capital.  In  this  way  net  earnings  are  reserved 
as  the  normal  basis  of  the  tax,  and  yet  some  revenue  is  assured 
to  the  government. 

»  Cf.  infra,  p.  263. 


250 


ESSAYS  IN  TAXATION 


THE   TAXATION  OF  CORPORATIONS 


251 


III.  Practical  Reforms 

It  is  clear  from  the  above  discussion  that  the  various  methods 
that  have  been  reviewed,  have  both  advantages  and  drawbacks. 
Practically,  however,  there  are  two  fundamental  questions: 
(1)  Shall  we  choose  a  tax  on  property  in  preference  to  a  tax 
on  earnings?  and  (2)  If  the  first  question  is  answered  in  the 
negative,  shall  we  choose  a  tax  on  gross  earnings  in  preference 
to  .one  on  net  earnings? 

The  problem  involved  in  the  first  question  is  the  advisability 
of  the  ad  valorem  system.  This  system,  it  will  be  remembered, 
differs  from  that  of  the  general  property  tax  discussed  above,  ^ 
in  that  the  assessment  of  corporate  property  is  made  as  a  unit 
by  a  state  board. 

There  is  no  doubt  that  the  ad  valorem  system  constitutes  a 
decided  advance  over  the  primitive  methods  of  the  general 
property  tax,  not  only  because  a  valuation  according  to  the 
unit  rule,  conducted  by  a  state  board,  is  at  once  more  effective 
and  more  equal  than  the  disjointed  system,  or  lack  of  system, 
involved  in  the  piecemeal  assessment  by  local  officials;  but 
also  because  the  ad  valorem  system  now  usually  includes  the 
value  of  the  franchise,  which  it  is  well-nigh  impossible  to  reach 
by  local  methods.  So  much  can  freely  be  admitted.  But 
what  shall  be  said  of  those  states,  like  Michigan  and  Wisconsin, 
which  have  reverted  from  an  earnings  to  an  ad  valorem  system? 
Are  we  to  consider  this  a  step  forward  or  a  step  backward? 

The  reasons  for  this  reversion  were  twofold.  In  the  first 
place,  the  earnings  tax  was  imposed  on  gross  earnings  and 
some  dissatisfaction  was  manifested  with  the  lack  of  equality 
as  between  the  corporations.  We  are  told  that  "  the  principal 
objection  was  the  inequalities  produced  in  the  relative  amount 
of  taxes  paid  by  the  different  companies.  The  plan  provided 
for  a  certain  per  cent  of  the  gross  earnings  per  mile  and  was 
graduated.  It  may  have  been  the  fault  of  the  graduating, 
but  the  fact  remains  that  the  tax  was  not  an  equitable  one  and 
the  system  was  abolished."  ^  As  a  matter  of  fact,  however, 
this  was  not  the  principal  objection.  Of  far  greater  weight  was 
the  second  reason  for  the  change,  namely,  the  desire  for  so- 
called  equal  taxation  as  between  individuals  and  corporations. 

1  Supra,  pp.  145-148. 

2C/.  Sixth  Report  of  the  Board  of  Tax  Commissioners.  Lansing,  1911, 
p.  55. 


It  was  claimed,  and  the  claim  was  undoubtedly  well  founded, 
that  the  property  of  the  public-service  corporations  was  not 
taxed  at  the  same  rate  as  that  of  individuals.  It  was  pointed 
out  that  these  corporations  were  practical  monopolies,  and  it 
was  alleged  that  their  charges  were  extortionate,  their  profits 
inordinate,  and  their  owners,  while  enjoying  special  privileges, 
unwiUing  to  bear  their  fair  share  of  the  public  burdens.  This 
cry  of  equal  taxation  won  the  day,  and  the  simplest  method 
of  carrying  out  the  mandate  of  the  people  seemed  to  be  to  make 
all  corporate  property  liable  equally  with  that  of  individuals. 

It  will  at  once  occur  to  the  critic  to  ask:  if  the  gross  earnings 
tax  was  objectionable  chiefly  on  the  ground  of  inadequacy, 
why  would  it  not  have  been  better  simply  to  increase  the  rate 
of  the  tax  and  to  leave  all  the  machinery  unaltered?  It  ap- 
peared, however,  to  those  in  charge  of  the  movement  in  both 
Michigan  and  Wisconsin  that  an  increase  in  the  rate  of  the 
gross  receipts  tax  would  be  difficult  to  accomplish  in  the  face 
of  the  powerful  interests  engaged,  and  that  a  far  more  effective 
and  more  easily  understood  battle  cry  would  be  that  of  the 
equal  taxation  of  all  property.  This  argument  prevailed,  and 
it  is  not  to  be  denied  that  it  may  have  been  the  part  of  political 
wisdom  in  those  states;  although  it  must  be  borne  in  mind  that 
both  in  Minnesota  at  the  time  and  in  California  a  few  years 
later  the  other  argument  proved  equally  effective  as  a  political 
shibboleth,  and  that  the  desired  equality  w^s  brought  about 
simply  by  the  imposition  of  higher  gross  earnings  taxes. 

Moreover,  from  the  point  of  view  of  tax  reform  in  general, 
this  demand  for  ''equal  taxation"  of  property  must  be  pro- 
nounced regrettable  and  even  mischievous.  No  one  of  course 
will  dispute  the  desirability  of  equality  in  taxation;  but  it  is 
necessary  to  define  more  exactly  what  this  really  implies.  If 
a  satisfactory  norm  of  taxation,  or  criterion  of  ability  to  pay, 
is  selected,  equality  in  the  application  of  this  norm  is  assuredly 
to  be  desired.  But,  as  we  have  seen  in  an  earlier  chapter, 
property  in  general  is  no  longer  an  adequate  test  of  ability  to 
pay.  Equal  taxation,  so  far  as  property  is  concerned,  is  supposed 
to  mean  the  continuation  of  the  general  property  tax,  undiffer- 
entiated and  unclassified.  This  theory,  which  is  still  so  widely 
held  by  the  average  American,  is  really  responsible  for  all  our 
troubles.  As  we  have  seen,  progress  is  taking  place  here,  as 
it  took  place  elsewhere,  through  a  splitting  up  of  the  general 
property  tax,  through  a  classification  of  property  and  through 


BIB 


252 


ESSAYS  IN  TAXATION 


i 


a  differentiation  of  taxation.  Moreover,  it  is  none  the  less 
true  that  equality  does  not  necessarily  mean  the  identical  tax 
at  the  same  rate  on  every  particular  piece  of  property.  But 
if  this  is  so,  and  if,  as  is  now  not  infrequently  the  case,  we 
select  certain  kinds  of  property  and  tax  them  in  a  different 
manner  or  at  a  different  rate,  why,  it  may  be  asked,  is  not  the 
same  method  apphcable  to  corporations  also?  The  cry  for 
"equal  taxation"  reflects  credit  on  the  general  intuition  or 
instinct  of  the  partisans  of  the  ad  valorem  system,  but  it  does 
not  reflect  the  same  credit  on  their  knowledge.  For  a  more 
adequate  acquaintance  with  fiscal  theory  would  have  brought 
them  to  the  conclusion  that  the  equal  taxation  of  property  in 
modern  times  does  not  necessarily  mean  the  equal  taxation  of 
the  property  owner;  or  to  put  it  in  another  way,  that  the  equal 
taxation  of  the  taxpayers— whether  individuals  or  corporations — 
does  not  necessitate  an  equal  taxation  of  their  property.  The 
test  of  equality  under  modem  conditions  is  as  we  now  know 
no  longer  to  be  found  in  the  undifferentiated  mass  of  property. 
It  is  instructive  to  note,  moreover,  that  in  the  very  state 
where  the  battle  for  ad  valorem  taxation  was  won  on  the  plea 
that  corporate  property  was  undertaxed,  the  old  principle 
should  be  thrown  overboard,  in  the  face  of  the  well-founded 
complaints  on  the  part  of  some  corporations  that  they  are 
now  overtaxed.  We  read  in  a  recent  report  of  the  special  com- 
mission in  Michigan  the  following: 

"This  complaint  (of  inequality)  must  be  considered  in  connection 
with  the  fact  that  the  properties  to  be  assessed  by  the  state  board  of 
assessors  forms  a  class  different  from  that  assessed  imder  the  general 
tax  law.  Where  it  is  possible  to  separate  property  into  classes  for 
purposes  of  taxation,  it  is  permissible  to  impose  varying  rates  upon 
the  different  classes. 

"It  is  not  the  purpose  of  this  system  to  make  a  discrimination  be- 
tween the  two  classes,  but  if,  incidentally  in  the  process  of  adminis- 
tration, discrimination  through  a  difference  in  rates  arises,  that  fact 
does  not  even  make  a  prima  facie  case  against  the  equality  of  the  tax 
levied  through  such  a  board  of  assessors  or  against  the  validity  of  the 
law."  1 

In  other  words,  "equal  taxation"  is  to  be  invoked  when  it 
means  a  remedy  for  the  relative  over-taxation  of  individuals; 

» Report  of  Commission  of  Inquiry  into  Taxation.  Lansing,  Michigan, 
1911,  p.  53. 


THE  TAXATION  OF  CORPORATIONS 


253 


but  it  is  not  to  be  invoked  when  it  means  the  relative  over- 
taxation of  corporations. 

We  may  go  still  further  and  say  that,  entirely  irrespective  of 
the  question  of  the  basis  of  taxation,  the  attempt  to  put  corpora- 
tions and  individuals  on  precisely  the  same  plane  in  matters  of 
taxation  is  based  upon  an  essentially  erroneous  theory  and  that 
it  fails  to  distinguish  between  the  principles  apphcable  to  nat- 
ural and  to  artificial  personalities.  For  a  corporation,  after 
all,  is  a  fictitious  entity  whose  economic  power  consists  of  that 
of  its  stockholders  and  bondholders.  The  fundamental  point 
of  our  whole  contention  is  that  corporations  should  not  be 
treated  like  individuals,  but  should  be  subjected  to  special 
forms  of  taxation.  It  is  gratifying  to  see  that  the  truth  of  this 
contention  is  now  being  recognized  by  the  specialists  in  Germany 
and  Switzerland — the  two  countries  where  the  most  active 
discussion  of  these  topics,  outside  of  the  United  States,  has 
taken  place  ^ — a3  well  as  by  those  of  this  country  '  and  Canada. 

*  "Gewiss  ist  bei  den  Aktiengesellschaften  eine  besondere  Steuerkraft 
vorhanden,  aber  dieselbe  kann  durch  die  allgemeinen  Subjektsteuern  von 
Vermogen  und  Erwerb  nicht  in  geeigneter  Weise  in  Anspruch  genommen 
werden.  Unser  Wirtschaftsleben  ist  so  komplizirt,  dass  die  Subjektsteuern 
allein  zur  Verwirklichung  der  Prinzipien  der  allgemeinen  und  gerechten 
Besteuerung  nicht  ausreichen.  Dazu  ist  ein  System  verschiedenartiger 
Steuem  notwendig  .  .  .  und  in  cinem  solchen  Steuersystem  darf  eine 
epezielle  Aktiengesellschaftssteuer  nicht  fehlen.  Denn  auf  die  Aktiengesell- 
schaften miissen,  dem  Wesen  dieser  Korporationen  entsprechend,  bes- 
ondere Steuergrundsatze  Anwendung  finden." — Dr.  W.  Gerloff,  Die 
kantonale  Besteuerung  der  Aktiengesellschaften  in  der  Schweiz.  Bern,  1906, 
p.  190. 

A  similar  conclusion  is  reached  by  the  chief  German  writer  on  the  sub- 
ject. "Fassen  wir  das  Ergebnis  unserer  kritischen  Betrachtung  der  Be- 
steuerung der  Aktiengesellschaften  durch  die  deutschen  Personalsteuem 
zusammen,  so  miissen  wir  als  den  Grundfehler  der  deutschen  Gesetzgebung 
bezeichnen,  dass  sie  sich  an  die  juristische  Personlichkeit  der  Akti- 
engesellschaft  klammert,  den  wirthschaftlichen  Charakter  der  Unterneh- 
mungsform  aber  in  keineriei  Weise  beriicksichtigt.  Von  diesem  rein  forma- 
len  Ausgangspunkte  aus  gelangt  sie  dazu,  die  Aktiengesellschaften  den 
physischen  Personen  nicht  blosz  in  handelsrechtlicher,  sondern  auch  in 
steueriicher  Beziehung  gleich  zu  steUen  (itahcs  mine).  Dass  aber  dieses 
liber  einen  Kamm  Scheren  nicht  ohne  Gewaltanwendung  und  ohne  Hint- 
ansetzung  der  Prinzipien  der  Personalsteuem  moglich  ist,  zeigen  schon  die 
mannigfaltigen  Modifikationen  die  an  den  Steuergesetzen  vorgenommen 
werden  mussten  um  den  fUr  physische  Personen  bestimmten  Steuerrock 
auch  filr  die  Aktiengesellschaften  einigermaszen  passend  zu  machen." — L. 
Blum,  Die  steuerliche  Ausnutzung  der  Aktiengesellschaften  in  Deutschland. 
Stuttgart,  1911,  pp.  132-133. 

*  Cf.  the  conclusion  of  Dr.  G.  E.  Snider  in  his  careful  study,  The  Taxation 


254 


ESSAYS  IN   TAXATION 


The  Canadian  commission  which  was  instituted  to  probe 
this  question  to  the  bottom  puts  the  matter  so  clearly  as  to 
deserve  quotation  in  detail.  After  a  comprehensive  statement 
of  the  actual  facts  and  after  pointing  out  the  various  distinctions 
of  fiscal  importance  between  individuals  and  corporations,  the 
commission  proceeds: 

"  In  the  light  of  the  facts  here  pointed  out  it  is  quite  obvious  that  the 
popular  belief  and  claim  that  corporate  property  can  and  sliould  be 
assessed  and  taxed  on  exactly  the  same  basis  as  private  property  is 
quite  impossible  of  reahzation.    A  survey  of  the  actual  practice  of 
taxation  in  different  states  and  pro\inces  reveals  the  fact  that,  where 
both  corporations  and  private  mdividuals  are  professedly  taxed  on  the 
same  basis  of  real  and  personal  property,  the  greatest  inequality  actu- 
ally prevails.    Thus,  if  the  tax  is  levied  on  tangible  property  .  .  .cor- 
porations are  found  to  be  taxed  very  lightly  as  compared  with  indi- 
viduals.   But  where  the  so-called  od  valorem  or  general  property  tax 
has  been  applied  to  corporations,  in  such  a  way  that  their  real  and 
personal  propertv  is  valued  by  capitalizing  the  income  which  the  cor- 
porations derive  from  their  whole  business,  as  in  the  case  of  the  new 
valuations  in  Michigan  and  Wisconsin,  and,  in  milder  form,  in  several 
other  states,  the  result  has  been  to  very  considerably  overtax  corpora- 
tions in  proportion  to  private  property.  ...    To  place  the  capitahzed 
income  of  corporations  upon  the  same  basis  as  the  general  property 
of  private  indi\iduals  is  plainly  neither  an  accurate  nor  an  equitable 
adjustment  of  taxation,  as  between  corporate  and  private  property. 
of  Gross  Receipts  of  Railways  in  Wisconsin,  Publications  of  the  Amencan 
Ecmwmio  Association,  Third  Series,  vol.  7,  no.  4,  1906.    After  quoting  the 
statement  of  the  Wisconsin  commission  that  "  The  safety  of  all  interests  rests 
on  the  principle  of  uniformity  between  all  classes  of  property  .  •  .  there 
must  be  equality  between  the  classes  as  well  as  between  the  property  m  the 
same  class,"  Dr.  Snider  remarks  (p.  120):  "Such  a  program  fails  to  rec- 
ognize modem  industrial  conditions  and  patent  fiscal  practices.  ...    The 
tendency  and  necessity  have  been  for  segregation  and  classification  rather 
than  aggregation  and  unification  of  property.    The  industrial  organization 
is  now  so  complex  that  uniformity  between  classes  of  property  is  an  indef- 
inite, indefinable  and  unattainable  '  ideal.'    What  the  Wisconsin  and  Mich- 
igan experience  shows,  what  is  made  evident  by  the  history  of  taxation  in 
this  country,  is  the  selection  of  classes  of  property  for  special  taxation. 
Real  property  has  been  the  bearer  in  the  past,  corporations  are  having  es- 
pecial attention  at  present,  and  especially  corporations  receiving  special 
privileges  from  the  state.    A  frank  recognition  of  the  true  state  of  affairs 
would  do  much  to  clear  away  the  debris  in  our  tax  systems.  .  .  .    Had  the 
Wisconsin  commission  frankly  recognized  this  principle  and  said   'we 
believe  that  the  railways  are  able  to  contribute  more  revenue  to  the  state, 
and  that  it  is  desirable  to  levy  a  heavier  rate  upon  them,'  the  present  sys- 
tem, based  upon  a  false  premise,  with  its  possibilities  of  political  corrup- 
tion   would  not  have  been  substituted  for  the  tax  on  gross  earmngs. 


I! 


THE  TAXATION  OF  CORPORATIONS 


255 


"Since  then  it  is  impossible  to  equitably  tax  private  property  and 
corporate  property  on  the  same  basis,  there  is  no  necessary  injustice 
or  inequality  in  taxing  them  upon  different  principles  or  by  different 
public  authorities.  In  fact,  it  is  the  attempt  to  tax  them  both  upon 
the  same  principle  which  works  injustice  and  inequality,  and  it  is  only 
by  taxing  them  upon  different  principles  suited  to  each  form  of  prop- 
erty that  it  is  possible  to  attain  to  approximate  justice  and  equality."  ^ 

We  see  then  that  the  cry  of  "equal  taxation  "  is  really  not  an 
adequate  reason  for  the  introduction  of  the  ad  valorem  system. 
For  in  the  first  place  "equal  taxation  of  property  "  is  in  modern 
times  not  real  equality  of  taxation;  and  secondly,  the  equality 
of  taxation  so  far  as  it  is  desirable  at  all  can  be  brought  about 
as  well  by  an  earnings  tax  as  by  an  ad  valorem  tax.  It  is  entirely 
a  question  of  the  rate. 

So  much  for  the  negative  side  of  the  argument— namely  that 
ad  valorem  taxation  is  not  needed  in  order  to  achieve  equaUty. 
We  now  come  to  the  positive  side  of  the  argument — that  the 
earnings  tax  is  preferable. 

As  we  have  seen  above,  if  the  basis  of  the  corporation  tax  is 
to  be  put  in  terms  of  property,  corporate  property  includes  more 
than  merely  the  physical  property.  The  franchise  or  the 
immaterial  elements  in  the  property  must  be  included.  As 
soon,  however,  as  an  attempt  is  made  to  measure  the  value 
of  the  franchise,  recourse  must  be  taken,  as  we  have  learned,  to 
earnings.  It  is  a  commonplace  of  modem  economics  that  capital 
is  nothing  but  capitalized  income;  or,  to  put  it  in  terms  familiar 
to  every  business  man,  a  business  or  a  piece  of  property  is 
worth  what  it  will  earn.    As  the  Wisconsin  commission  puts  it: 

"It  is  the  financial  rule  in  the  markets  of  this  country  and  all  over 
the  world,  that  the  worth  of  property  is  determined  by  what  it  will 
produce  in  income.  If  the  permanency  of  the  income  is  assured  from 
past  results  in  operation,  the  risk  of  investment  is  less  and  the  value 
more  stable.  The  earnings  in  the  opinion  of  financiers  is  the  final  test 
of  the  value  of  corporate  securities,  and  the  estimate  of  the  earning 
capacity  of  railroads  formed  by  such  men  and  acted  upon  in  buying 
and  selling  of  the  securities  in  the  market  generally  estabUshes  the 
market  price."  * 

1  Report  of  Ontario  Commission  on  Railway  Taxation,  Toronto,  1905, 
pp.  11-12. 

2  First  Biennial  Report  of  the  Wisconsin  Tax  Commission,  Madison,  1903, 
pp.  185-186.  In  a  later  report  the  commission  states :  "  As  to  nearly  all  such 
properties,  this  capacity  to  produce  income  will  ordinarily  be  the  dominant 
factor  in  ascertaining  values."    Fifth  Report,  1911,  p.  53.    But  the  conclu- 


256 


ESSAYS  IN  TAXATION 


Where  individual  pieces  of  property  are  subject  to  purchase 
and  sale  in  the  market,  the  property  or  capital  value  is  as 
readily  ascertainable  as  the  earning  or  income  value.  But 
where,  as  in  the  case  of  large  corporations,  there  is  no  market 
or  no  regular  purchase  and  sale,  the  only  possible  method  of 
ascertaining  capital  value  (or  so-called  property  value)  is  by 
capitalizing  the  earnings,  present  and  prospective.  Hence  the 
ad  valorem  system  cannot  satisfy  itself  with  the  inventory 
method,  or  the  mere  appraisal  of  the  physical  property  of  a 
corporation.  It  has  been  found  necessary  to  add  the  valuation 
of  the  franchise;  and  as  soon  as  this  is  done,  the  earnings  method 
which  has  been  abandoned  is  brought  in  again  by  a  back  door.^ 
The  various  boards  of  assessment  as  we  have  seen,  generally 
refuse  to  divulge  the  exact  method,  for  fear  of  an  attack  on  their 
assessments.  But  that  earnings  is  the  chief  factor  in  their 
appraisal  is  an  open  secret.^  It  is  not  a  matter  for  pride  to  read 
in  a  foreign  commentary: 

"We  see  why  it  is,  then,  that  though  on  almost  every  hand,  even 
in  the  states  which  believed  themselves  forced  to  abandon  it,  the  earn- 
ing power  of  corporations  is  held  to  be  the  only  reliable  and  satisfactory 
basis  of  taxation  .  .  .  practically  none  of  the  American  states  find 
themselves  able  to  frankly  and  fully  accept  it.  Where  it  is  employed, 
it  is  under  some  disguise  or  legal  fiction,  and  commonly  with  the  tacit 
consent  of  the  taxpayer  and  taxing  authority  that  the  fiction  shall  not 
be  called  in  question.''  ^ 

sion  that  therefore  the  ad  valorem  system  should  be  continued  by  no  means 
follows. 

^  "  Thus,  though  earning  power  had  been  expressly  discarded  as  a  basis 
of  taxation,  and  the  ad  valorem  system  adopted  in  its  place,  yet  the  more  the 
Commissioners  studied  the  subject  in  its  practical  operation,  the  more  they 
were  driven  back  to  income  as  the  leading  factor  in  value." — Report  of 
Ontario  Commission  on  Railway  Taxation,  1905,  p.  49. 

2  See  the  statement  by  one  of  the  officials  himself  that  in  West  Virginia 
"the  element  of  value  which  is  chiefly  relied  upon  in  valuing  all  the  different 
classes  of  public  service  corporations  is  the  earning  power  of  the  property." 
Addresses  and  Proceedings  of  the  Fourth  Conference  of  the  International  Tax 
Association,  1911,  p.  259. 

'  Report  of  Ontario  Commissi&n,  p.  17.  On  another  page  the  Commission 
sums  up  its  estimate  of  the  ad  valorem  system — an  estimate,  in  which 
every  impartial  judge  will  concur:  "The  state  of  Michigan  in  determin- 
ing to  change  from  the  gross  earnings  to  the  ad  valorem  system  of  taxing 
its  railroads,  made  the  most  elaborate  and  perfect  attempt  on  record  to 
determine  what  the  physical  property  of  the  railroads  was  worth  on  the 
basis  of  cost  of  reproduction,  less  the  normal  depreciation  for  wear  and  use. 
But  when  at  a  cost  of  $60,000,  this  very  elaborate  and  accurate  appraisal 


THE  TAXATION  OF  CORPORATIONS 


257 


If,  however,  the  ad  'valorem  method  necessarily  means  in 
practice  the  indirect  use  of  the  earnings  method,  the  question 
arises:  why  not  use  directly  what  you  are  compelled  to  use 
indirectly.  We  may  go  further  and  affirm  that  nothing  is 
gained,  but  much  is  lost,  by  electing  the  indirect,  rather  than 
the  direct,  earnings  method.  For,  as  we  have  seen,  the  direct 
earnings  method  is  susceptible  of  reduction  to  a  mathematical 
rule;  whereas  the  indirect  earnings,  or  ad  valorem,  method  is 
open  to  the  objections  of  secret,  irresponsible,  star-chamber 
methods.  We  may  again  agree  with  the  Ontario  commission 
in  thinking  that:  ' 

"  The  essential  fairness  of  taking  earnings  as  a  basis  for  taxation  of 
corporations  is  based  on  the  general  principle  that  the  taxes  vary  with 
the  capacity  of  the  company  to  pay  them,  whereas  taxation  on  the  basis 
of  general  property  results  in  all  manner  of  inequality.  The  amount  of 
tangible  property  required  by  the  various  corporations  has,  in  the  first 
place,  no  necessary  relation  to  their  relative  earning  power,  and  in  the 
second  place,  bears  no  accurate  relation  to  the  earning  power  of  the 
same  company  at  different  periods.  The  capital  stock  tax  has  some- 
thing of  the  same  defect  in  addition  to  those  already  mentioned,  yet 
it  has  a  certain  amount  of  flexibility.  Only  the  tax  on  earnings  follows 
automatically  the  capacity  of  the  corporation  to  pay,  and  while  even 
it  has  inequahties,  yet  it  is  very  much  more  equitable  than  any  other 
practical  system."  ^ 

The  difference  between  the  earnings  system  and  the  ad  valorem 
system  is  the  difference  between  publicity  and  secrecy,  between 
certainty  and  arbitrariness,  between  simplicity  and  complexity, 

was  made,  what  was  the  practical  value  of  it  for  taxation  purposes?  Vir- 
tually nil.  The  real  valuation  was  determined  on  quite  other  grounds 
and  mainly,  as  was  admitted  by  those  making  the  assessment,  on  the  basis 
of  earnings.  The  result  was  that  some  roads  were  valued  considerably 
above  the  cost  of  reproduction,  while  others  were  valued  very  much  below  it 
and  where  the  valuation  was  much  the  same  as  that  of  appraisal  it  was  a 
mere  coincidence.  Where  the  valuation  was  above  the  appraisal  the  dif- 
ference was  called  the  intangible  or  franchise  value,  but  where  it  was  below 
the  appraisal  the  difference  was  not  named,  though  more  or  less  intangible 
also.  But,  though  somewhat  costly  for  Michigan,  the  experiment  tried 
there  has  been  exceedingly  valuable  for  the  rest  of  the  world,  and  therefore, 
by  us  at  least,  the  outlay  need  not  be  regretted.  The  experiment  has 
demonstrated  that,  however  serviceable  such  a  valuation  may  be  in  af- 
fording an  independent  and  scientific  basis  for  judging  the  cost  of  produc- 
tion of  modem  railroads,  under  the  varying  conditions  of  such  a  state  as 
Michigan,  it  is  quite  futile  as  a  means  of  getting  at  the  commercial  value 
of  a  railroad  as  a  going  concern,  or  as  a  basis  of  taxation. — Ibid.,  p.  14. 
*  Op,  cU.,  p.  23. 


258 


ESSAYS  IN  TAXATION 


i 


between  precision  and  guess  work— in  short,  between  modernism 
and  medievalism.! 

If  then  the  earnings  tax  is  to  be  preferred  to  the  ad  valorem  tax 
the  question  remains,  shall  it  be  gross  earnings  or  net  earnings? 
As  a  matter  of  principle  it  is  conceded  by  all  writers  that  net  earn- 
ings approach  more  closely  to  the  ideal  method.  "  It  is  plain," 
we  are  told  by  the  Ontario  commission,  "that  the  only  true 
estimate  of  a  railroad  property  is  its  earning  power  or  its  income. 
Its  income,  therefore,  would  appear  to  be  the  proper  and  indeed 
the  ideal  basis  for  taxation,  if,''  they  add,  ''  it  is  found  to  be  ca- 
pable of  discovery  and  definition  without  too  elaborate  or  costly 
a  mechanism."  It  is  owing  to  the  doubt  expressed  in  the  last 
sentence  that  not  a  few  authorities  prefer  gross  earnings.  For 
the  ascertainment  of  gross  earnings  presents  none  of  the  diffi- 
culties which  are  deemed  to  be  inseparable  from  that  of  net 
earnings.  This  is  the  position  taken  by  the  Ontario  commission 
of  1895,  by  the  California  commission  of  1906,  and  by  the 
Virginia  commission  of  1911. 

It  is  necessary,  however,  to  bear  in  mind  two  points.  One  is 
the  marked  progress  that  it  is  being  made  in  the  matter  of  corpo- 
rate accounting  in  the  United  States,  thus  annually  bringing  us 
nearer  to  the  time  when  the  ascertainment  of  net  earnings  will 

*  For  an  instructive  comparison  in  detail  between  the  ad  valorem  and 
earnings  methods  see  the  work  of  Snider,  mentioned  supra,  page  253, 
For  other  material  and  discussion  on  this  question  see  the  Report  of  the 
Commission  on  Revenue  and  Taxation  of  the  State  of  California,  Sacramento, 
1906,  chaps,  iii.  and  iv.;  First  Biennial  Report  of  the  Minnesota  Tax  Com- 
mission, Saint  Paul,  1908,  chaps,  vi.  and  vii.;  and  Second  Biennial  Report 
of  the  same,  1910,  chap,  xviii. ;  Report  of  the  [Special]  Virginia  Tax  Commis- 
sion, Richmond,  1911,  appendix.  The  Virginia  report  terms  the  ad  valorem 
system  "compUcated,  confused  and  uncertain";  op,  cit.,  p.  256. 

For  an  interesting  contemporary  discussion  of  the  Wisconsin  agitation 
see  L.  W.  Bowers  and  F.  P.  Crandon,  Arg^iinent  submitted  to  the  State  Tax 
Commission  of  Wisconsin  on  behalf  of  the  Chicago  and  Northwestern  Rail- 
way Company,  Chicago,  1901;  F.  P.  Crandon,  Railway  Taxation  in  Wis- 
consin, Chicago,  1901;  J.  M.  Dickinson,  Railway  Taxation  in  Wisconsin, 
Argument  made  before  the  Joint  Committee  on  Assessment  and  Collection  of 
Taxes  at  Madison,  March  5th,  1901 ;  G.  R.  Peck  and  A.  S.  Dudley,  Should 
the  present  System  of  Railway  Taxation  in  Wisconsin  be  changed?  Sugges- 
tions to  the  Honorable  Tax  Commission,  Chicago  [1901]. 

For  later  arguments  in  favor  of  the  earnings  taxation  of  railways  see 
Railway  Assessment  and  Taxation  in  the  Province  of  Ontario.  Argu?nent8 
presented  by  Messrs.  Hellmuth  and  MacMurchy  to  the  Ontario  Commission 
or  Railway  Taxation,  Oct.,  1904;  Railroad  Taxation,  Renmrks  before  the 
Minnesota  Academy  of  Social  Science  at  Minneapolis,  Dec.  6, 1907,  by  W.  W. 
Baldwin  of  Burhngton,  Iowa. 


THE  TAXATION  OF  CORPORATIONS  259 

be  subject  to  far  less  difficulty  than  is  the  case  at  present.  The 
otner  is  the  fact  that  the  California  commission  itself,  which 
reported  m  favor  of  gross  receipts,  recommended  the  utilization 
of  net  earnmgs  as  a  necessary  means  of  ascertaining  the  proper 
rate  of  the  gross  earnings  tax.^  Furthermore,  as  we  have  seen  * 
naany  of  the  states  which  levy  either  a  gross  receipts  or  a  fran- 
chise tax  require  from  the  corporations  returns  which  enable 
the  board  to  compute  the  net  earnings,  and  which  then  lead  to  a 
valuation  of  the  property  through  a  capitalization  of  the  net 
earnings  If  net  earnings  are  thus  utilized  indirectly,  why 
should  they  not  be  utilized  directly?  The  argument  in  this 
respect  as  to  the  choice  between  gross  and  net  earnings  is  pre- 
cisely the  same  as  the  one  advanced  above  as  to  the  choice 
between  property  and  earnings  taxation. 

As  a  matter  of  practical  wisdom  it  may  be  conceded,  however 
that  m  not  a  few  of  the  American  states  simplicity  and  conven- 
ience of  administration  are  preferable  to  more  ideal  but  more 
difficult  methods.    In  such  states  the  taxation  of  gross  earnings 
naay  be  recommended  as  an  easy  solution  of  the  problem  for  the 
time  being.2    It  must,  however,  not  be  forgotten  that  with  the 
improvement  of  administrative  methods  and   with   a  fuller 
appreciation  of  the  modem  principles  of  accounting,  the  time 
IS  fast  approaching  when  the  net  earnings  system  will  be  ap- 
plicable to  all  corporations  in  general  by  the  states,  as  it  is  now 
applied  without  difficulty  by  the  federal  government  in  the 
Umted  States,  and  by  most  of  the  leading  countries  abroad. 
One  objection  still  remains.    It  has  sometimes  been  urged  that 
a  tax  on  corporate  property  is  more  just  than  a  tax  on  corporate 
earnings,  because  the  value  of  a  corporate  security  is  fixed  not 
only  by  its  present,  but  also  by  its  prospective,  productiveness. 
Ihis  IS,  however,  a  specious  objection,  since  under  a  system  of 
*  Op.  cit.,  p.  95. 

2  Mr.  Allen  Ripley  Foote  makes  an  ingenious  suggestion  designed  to 
accomphsh  the  results  of  a  net  earnings  method  through  the  medium  of  a 
gross  earnmgs  method.  His  proposition  is  to  levy  on  railroads  at  least 
a  tlat  rate  tax  on  gross  operating  revenue  plus  a  differential  on  the  margin 
between  operatmg  revenue  and  operating  expenses.  Cf.  "Taxation  of 
Railroads  m  the  United  States,"  in  Addresses  and  Proceedings  of  the  Fifth 
Anmial  Conference  of  the  National  Tax  Association,  Columbus  1912  p 
u  ml'  ^^'  ^^^^  suggestive  and  practical  discussion  in  Alfred  E  Hol- 
comb,  The  Assessment  of  Public  Service  Corporations,  Richmond  1911  re- 
prmted  from  the  Proceerfm^.s  of  the  Fifth  National  Tax  Conference:  and  the 
same  author  s  One  Assessment-One  Levy.  Address  delivered  at  the  Second 
^tate  Tax  Conference  held  at  Buffalo,  Jan.,  1912. 


Ill 


260 


ESSAYS  IN  TAXATION 


I 


earnings  taxation  the  future  product  will  be  taxed  when  it  ulti- 
mately appears.  If  productiveness  be  accepted  at  all  as  the 
standard  of  capacity— and  this  is  tacitly  assumed  in  the  above 
objection— the  most  logical  and  defensible  method  is  the  taxa- 
tion of  the  product  as  it  appears.  But  consideration  for  the 
individual  producer  makes  it  necessary,  as  has  been  pointed  out 
above,  to  regard  net,  not  gross  product;  and,  therefore,  if  any 
one  principle  be  accepted  as  the  basis  of  the  general  corporation 
tax,  it  should  be  net  profits,  and  not  gross  earnings  or  property. 

European  experience  all  points  to  taxation  of  net  earnings 
as  the  best  system.  One  country,  indeed,  still  assesses  cor- 
porate property  in  some  form  or  other.  Switzerland,  as  we 
have  seen,  is  the  only  European  state  which  has  retained  the 
mediaeval  system,  once  common  to  all  countries.  The  reasons, 
as  was  pointed  out,  are  the  comparative  equahty  of  conditions 
and  the^  survival  of  the  primitive  villages  and  agricultural 
communities  with  their  placid  and  homogeneous  economic  life. 
It  is  significant,  however,  that  many  of  the  Swiss  common- 
wealths, in  which  we  notice  a  gradual  industrial  development 
and  a  consequent  differentiation  of  property,  have  attempted  to 
remedy  some  of  the  obvious  defects  of  the  general  property 
tax  by  supplementing  it  with  an  income  tax.  Thus  some  can- 
tons, like  Schaffhausen,  Zurich,  Basel,  Aargau  and  others,  tax 
corporations  on  their  capital  or  their  reserve  fund;  or,  if  the  net 
receipts  exceed  a  certain  percentage  of  the  capital,  on  their 
income.!  This  system  resembles,  although  in  a  very  slight 
degree,  those  of  New  York  and  Pennsylvania.  Other  cantons, 
like  Bern,  have  abandoned  the  general  property  tax,  and  assess 
corporations  only  on  their  real  estate  and  their  income.  Finally, 
some  cantons,  like  St.  Gall  and  Neuchatel,  tax  corporations 
directly  only  on  their  income.  Even  in  Switzerland,  with  its 
fondness  for  mediaeval  customs,  we  see,  therefore,  that  the 
tendency  is  almost  everywhere  away  from  the  taxation  of  corpo- 
rate property.  In  the  other  European  states  this  tendency  has 
passed  into  accomplished  fact. 

In  England,  all  corporations  are  held  to  be  "persons"  within 
schedule  D  of  the  income  tax,  and  consequently  they  pay  a 
tax  on  their  net  annual  profits  or  gains.    A  series  of  important 

» The  facts  stated  in  this  paragraph  are  accurate  as  of  1895,  the  date  of 
the  first  edition  of  this  book.  For  the  few  changes  that  have  taken  place 
since  that  date  see  the  details  in  W.  GerlofF,  Die  Kantonale  Besteuerung 
der  Aktiengesellschaften  in  der  Schweiz,  Bern,  1906. 


THE  TAXATION  OF  CORPORATIONS  261 

cases  has  elaborated  the  principles  that  should  determine  the 
exact  nature  of  net  profits.  ^    The  rules  laid  down  are  analogous 
to  those  described  in  the  definition  of  net  receipts  just  given 
The  tax,  moreover,  is  paid  before  the  dividends  are  declared. 
Railroads  are  also  subject  to  the  special  passenger  duty  of  five 
per  cent  on  receipts  from  passengers,  which  is  merely  a  survival 
of  the  old  tax  on  stage  coaches,  and  to  a  corporation  duty 
which  IS  intended  to  take  the  place  of  the  ''death  duties'^  on 
individuals.    Even  in  the  matter  of  local  taxation  or  rates  the 
railways  are  taxed  on  what  amounts  roughly  to  net  receipts 
In  theory  the  real  estate  of  railways  like  that  of  individuals  is 
rated  on  the  basis  of  rental  value,  i.e.  in  the  case  of  railways  the 
property  is  locally  taxable  on  the  basis  of  what  a  hypothetical 
tenant  would  give  for  it  if  renting  it.     In  practice  the  gross 
receipts  are  taken  and  certain  rough  deductions  permitted. 
Ihe  difl5culty  arises  from  the  fact  that  each  local  stretch  of 
line  or  piece  of  real  estate  is  separately  assessed  by  the  local 
officials,  as  is  still  the  case  in  New  York  state.     In  Scotland 
on  the  other  hand  the  unit  rule  is  observed  under  the  name  of 
cumulo-value  rating— 2.  e.  a  valuation  of  the  line  as  a  whole 
From  the  gross  receipts  73%  are  deducted  for  working  expenses 
and  tenants'  allowances,  separated  under  distinct  heads.    The 
remainder— roughly  the  net  earnings— is  divided  between  sta- 
tions and  runmng  line,  and  the  rates  due  on  the  latter  item  are 
then  distributed  or  ''allocated''  to  the  separate  local  divisions 
on  the  basis  of  relative  mileage.     In  Ireland  where  the  unit 
rule  IS  also  observed,  the  distribution  to  the  localities  is  made 
on  the  basis  of  train  mileage.^ 

In  France,  all  corporations  pay  a  tax  on  net  profits  in  the 
shape  of  a  three  per  cent  tax  on  dividends,  coupons  and  prof- 
its, known  as  the  tax  "swr  le  revenu  des  valeurs  mobilieres." 
The  tax  is  also'  applicable  to  joint-stock  companies  and  to 
commercial  enterprises,  ^  while  mutual  insurance  companies 
and  similar  associations  have  by  judicial  interpretation  been 

1  Ellis,  A  Guide  to  the  Income  Tax  Acts,  2d  edition,  pp.  80,  92-101. 

2  For  details  of  the  system  in  the  three  countries  see  the  Final  Report  of 
the  lioyal  Commission  on  Local  Taxation,  1901. 

^  The  tax  is  imposed  on  "les  int^rets,  dividendes,  revenus  et  tous  autres 
produits  des  actions  de  toute  nature  "  of  stock  companies,  and  on  "les  in- 
t6r§ts,  produits  et  b^n6fices  annuelles  des  parts  d'interet  et  commandities  " 
of  all  associations,  etc.,  without  a  divisible  share  capital.  Law  of  June  29 
1872,  art.  1.  Cf.  Tanquerey,  Traite  Iheorique  et  pratique  de  Vimpdt  sur  U 
revenu  des  valeurs  nuMlieres,  pp.  23,  51,  143,  etc. 


I 


262 


ESSAYS  IN  TAXATION 


m 


exempted.  Like  individuals,  corporations  are  also  subject 
to  real  estate  taxes  and  to  the  license  taxes  {impdts  des  patentes) 
on  occupations.  In  the  case  of  railroads,  however,  we  still 
find  a  partial  tax  on  gross  receipts.  The  five  per  cent  tax  on 
gross  receipts  from  freight,  which  was  imposed  after  the  Franco- 
Prussian  war,  proved  to  be  so  vexatious  and  so  obstructive  to 
industrial  development  that  it  was  abolished  a  few  years  later.  ^ 
But  the  old  ''tax  on  pubhc  conveyances" — a  percentage  on  the 
fare — ,  which  dates  from  the  last  century,  was  extended  in 
1855  to  the  receipts  from  passengers  and  from  express  traffic. 
In  practice,  this  ''public  conveyance"  or  transportation  tax^ 
is  not  a  direct  tax  on  the  corporations,  but  an  indirect  tax  on 
passengers  and  on  consignors  of  express  packages;  for  the  tax 
is  added  to  the  price  of  the  ticket  or  receipt  and  is  paid  by  the 
individual.  The  only  direct  tax  is  thus  laid  on  net  earnings. 
Corporations  also  pay  the  indirect  taxes,  like  the  stamp  tax 
{droit  de  timbre)  and  the  transfer  tax  {droit  de  transmission) 
on  shares  and  bonds;  but,  simply  to  facilitate  the  administra- 
tive procedure,  they  may  and  generally  do  commute  for  these 
by  paying  an  annual  tax  of  one-twentieth  and  one-fifth  of  one 
per  cent  respectively  on  the  amount  of  their  capital  stock. 
In  Italy  corporations  are  taxed  on  their  income  or  net  earn- 
ings by  the  imposta  sui  redditi  delta  ricchezza  mobile.  This 
"revenue  of  personal  property,"  as  it  is  called,  is  declared  to 
consist,  so  far  as  corporations  are  concerned,  in  "all  interest'  or 
dividends  paid."  ^  To  make  the  term  dividends  still  clearer, 
the  law  provides  that  "in  the  estimate  of  income  are  included 
all  sums,  under  whatsoever  title,  distributed  among  the  share- 
holders or  added  to  capital,  surplus  or  sinking  fund  or  otherwise 
used  in  canceUing  debts."  *  The  Italian  system  is  thus  as  com- 
prehensive as  the  English. 

1  Levied  in  1874;  abolished  in  1878. 

2  Droit  BUT  lea  voitures  publiquea.  C/.  Vignes,  Traite  des  imp6t8  en 
France,  4th  edition,  i.,  p.  192. 

^"Sono  considcrati  come  redditi  di  ricchezza  mobile  esistenti  nello 
stato  .  .  .  gli  interessi  e  dividendi  pagati  .  .  .  delle  compagnie  commer- 
ciali,  industriali  e  di  assicurazione."    Law  of  August  24,  1877,  art.  3,  b. 

*  "Nel  reddito  delle  societd  anonime  ed  in  accomandita  per  azioni,  com- 
presevi  le  societd  d'aesicurazione  mutua  od  a  premio  fisso  saranno  compu- 
tate  indistintamente  tutte  le  somme  ripartite  sotto  qualsiasi  titolo  fra  i 
soci  e  quelle  portate  in  aumento  del  capitale  o  del  fondo  di  riserva  ed 
ammortizzazione,  od  altrimente  impiegate  anche  in  estinzione  dei  debiti." 
Ibid.,  art.  30.  Cf.  in  general,  Oronzo  Quarta,  LHmposta  sulla  Ricchezza 
Mobile,  2  vols.  (Turin).    See  also  Alessio,  Saggio  aid  Sistema  Tributario  in 


THE  TAXATION  OF  CORPORATIONS 


263 


In  Germany  the  taxation  of  corporations  before  the  Great 
War  varied  widely.  ^    A  few  of  the  smaller  states  taxed  corpora- 
tions for  state  purposes  only  on  their  realty  and  on  their  occu- 
pation {Gewerbe-steuer) ,  and  not  on  their  income  or  net  profits, 
because  the  shareholders  were  individually  taxed  on  their  income 
from  the  corporations.    This  point  will  be  discussed  in  detail 
m  the  following  chapter.  In  most  of  the  states,  however,  corpora- 
tions were  taxed  on  their  income.     In  a  few  cases,  indeed,  they 
were  also  subject  to  the  supplementary  and  very  slight  prop- 
erty taxes  recently  imposed.    The  local  taxes  vary  exceedingly 
throughout  the  empire.    But  whenever  corporations  are  taxed 
at  all  on  receipts,  it  is  on  net  income.    Corporations  were  for- 
merly exempt  from  the  local  income  tax,  but  they  are  now 
usually  subject  to  it  wherever  it  exists.^    In  only  one  instance 
are  corporations  taxed  on  their  capital  stock— in  the  case  of 
mutual  insurance  companies,  whose  so-called  dividends  merely 
return  in  part  the  premiums  paid  by  policy  holders.    On  ac- 
count of  the  difficulty  of  ascertaining  the  exact  profits,  Baden 
therefore  levied  the  income  tax  on  an  assumed  amount  of  net 
profits,  fixed  at  five  per  cent  of  the  capital  stock.^    Germany 
was  still  backward  in  its  system  of  corporate  taxation,  in  that 
It  did  not  yet  recognize  the  necessity  of  special  corporation 
taxes  and*  still  clung  in  great  measure  to  the  principle  oL"  equal 
taxation"  with  individuals,  which   the   scientists  concede  to 
be  a  mistake.^    Since  the  war,  however,  all  corporations  are 
subject  to  the  federal  tax  on  income,  a  part  of  which  is  then 
redistributed  to  the  states. 

In  Austria  all  corporations  have  for  some  years  been  subject 
to  a  special  tax  of  ten  per  cent  on  net  profits  (including  interest 

Italia,  i.,  p.  345;  and  the  various  authorities  mentioned  in  Seligman   The 
Income  Tax,  1910,  p.  339.  ' 

,olf  °^  ^"^  ^®^^^^^  ^^  *°  corporate  taxation  in  each  of  the  German  states  in 
1888  see  Antom,  "Die  Steuersubjecte  in  Zusammenhalte  mit  der  Durch- 
fiihrung  der  Allgemeinheit  der  Besteuerung  nach  den  in  Deutschland 
geltenden  Staatssteuergesetzen,"  in  Finanz-Archiv,  v.  (1888)  pp  382-499 
specially  475  et  seq.  For  the  later  detaUs  see  L.  Blum,  Die  'steuerliche 
Ausnutzung  der  Aktiengesellschaflen  in  Deutschland.    Stuttgart,  1911. 

2C/.  Meier,   "Ueber  die  Frage  der  Communalbesteuerung"   (in  Zehn 
Gutachten  und  Benchte  iiber  die  Communalsteuerfrage,  veroffentlicht  vom 
Verein  fiir  Sodalpolitik,)  p.  104. 
'  Lewald,  "Die  direkten  Steuem  in  Baden,"  in  Finanz-Archiv  iii    p  807 
-•  See  the  explanation  of  the  "Ruckstandigkeit"  of  the  German  states  in 
Blum,  op.  cit.  p.  139. 


264 


ESSAYS  IN  TAXATION 


If 


on  bonds),  but  with  two  interesting  variations:  first  that  if 
dividends  exceed  10%,  the  rate  is  higher;  and  second,  that  if 
there  are  no  profits  at  all  the  tax  must  be  at  least  one  per  mill  of 
the  stock  and  bonds.*  The  net  receipts  tax  may  thus  be  de- 
clared applicable  in  theory  to  all  corporations.  Some  peculiar 
limitations  arise,  it  is  true,  from  the  clashing  of  commonwealth 
laws,  but  these  will  be  discussed  in  the  next  chapter. 

IV.  The  Legal  Situation 

Our  conclusion  that  the  taxation  of  receipts  is  without  doubt 
the  best  system  brings  us  face  to  face  with  the  facts  of  American 
constitutional  law.  Is  a  tax  on  receipts  unconstitutional?  Is 
it  in  conflict  with  the  constitutional  inhibition  of  state  interfer- 
ence with  interstate  commerce?  This  is  an  important  question. 
Let  us,  then,  consider  the  legal  as  well  as  the  economic  aspects 
of  the  problem.'^ 

The  earliest  important  case  involving  this  question  construed 
the  Pennsylvania  law  which  imposed  a  tax  on  each  ton  of  mer- 
chandise carried,  and  an  additional  tax  of  a  certain  percentage  on 
the  gross  receipts  of  railroad  companies.  The  tonnage  tax  was 
declared  unconstitutional.^  The  same  principle  was  later  applied 
to  a  tax  of  one  cent  for  every  message  sent  by  a  telegraph  com- 
pany. This  also,  was  held  to  be  void  as  a  tax  on  interstate  com- 
merce.^ On  the  other  hand,  a  state  tax  on  the  gross  receipts  of  a 
domestic  railroad  company  was  upheld  chiefly  on  the  ground 
that  the  tax  was  laid  upon  a  fund  which  had  already  become 
property.  The  gross  receipts  were  said  to  be  the  fruits  of  trans- 
portation after  they  had  become  intermingled  with  the  other 
property  of  the  carriers.^  The  court,  however,  also  contended  that 

*  Steinitzer,  Diejungsten  Reformen  der  veranlagten  Sieuern  in  Oesterreich, 
Leipzig,  1905;  and  the  same  author's  "Ziir  Besteuerung  der  Aktiengesell- 
schaften  in  Oesterreich,"  in  Conrad's  Jahrbucher,  dritte  Folge,  vol.  xxviii. 
(1904),  p.  319  et  seq. 

2 See  in  general,  Goodnow's  "Taxation  of  Railway  Gross  Receipts,"  in 
Political  Science  Quarterly,  vol.  ix.  (1894),  p.  233,  and  "State  Taxation  of 
Interstate  Commerce,"  in  Publications  of  the  American  Economic  Associa- 
Hon,  vol.  V.  (1904),  p.  153  ci  seq.  Cf.  T,  R.  Powell,  Indirect  Encroachments 
on  Federal  Authority  by  the  Taxing  Power  of  the  States,  a  volume  reprinted  in 
1919  from  articles  in  the  Harvard  Law  Review,  vols,  xxxi.,  xxxii. 

» State  Freight  Tax  Cases,  15  WaU.  232  (1872). 

*  Telegraph  Co.  vs.  Texas,  105  U,  S.  460  (1881). 

*  State  Tax  on  Railway  Gross  Receipts,  15  Wall.  284  (1872),  This  was  in 
imitation  of  the  case  of  Brown  vs.  Maryland,  which  held  that  articles  lost 


THE  TAXATION  OF  CORPORATIONS 


265 


this  was  a  tax  on  the  franchise,  measured  by  the  amount  of  the 
business  transacted,  so  that  it  was  not  clearly  decided  what 
was  taxed,  the  franchise  or  the  property.^  Later  the  Supreme 
Court  limited  this  general  principle  and  decided  that  when  the 
gross  receipts,  even  of  a  domestic  corporation  were  derived 
entirely  from  interstate  or  foreign  commerce,  they  could  not  be 
taxed.  ^ 

In  the  case  of  foreign  companies,  the  rule  seemed  at  one  time 
to  be  more  strict;  for  a  tax  on  the  gross  receipts  of  a  foreign 
corporation,  even  if  derived  only  in  part  from  interstate  com- 
merce, was  declared  void  to  the  extent  that  the  receipts  were 
derived  from  such  interstate  commerce.^  A  tax  on  the  gross 
receipts  from  business  done  wholly  within  the  state  was,  how- 
ever, upheld."^ 

This  distinction  between  foreign  and  domestic  companies 
seemed  to  be  maintained  in  a  later  leading  case.  The  Maine 
tax  on  gross  receipts  was  upheld  as  being  a  tax  not  on  receipts, 
but  on  the  privilege  of  exercising  the  corporate  franchise,  the 
resort  to  receipts  being  made  simply  to  ascertain  the  value  of  the 
business.  But  although  this  action  was  brought  nominally 
against  a  foreign  corporation,  the  facts  show  that  the  tax  was 
due  from  a  domestic  corporation  leased  by  this  foreign  corpora- 
tion.^ 

The  reason  for  the  distinction  between  domestic  and  foreign 
corporations,  if  there  was  such  a  distinction,  in  the  view  of  the 
court,  seems  to  be  that  in  the  case  of  a  domestic  corporation  the 

their  character  of  imports  after  they  had  left  the  original  package  or  the 
hands  of  the  original  importer,  and  had  then  become  a  pprt  of  the  general 
property  of  the  state.  But  see  the  second  note  following.  See  also  Balti- 
more and  Ohio  R.  R.  Co.  vs.  Maryland,  21  Wall.  456  (1874),  which  held  that 
a  charter  stipulation  that  a  railway  should  pay  a  part  of  its  earnings  to  the 
state  as  a  bonus,  was  not  a  tax,  and  was  perfectly  valid. 

^  In  Fargo  vs.  Michigan,  121  U.  S.  210,  the  court  emphasizes  this  side  of 
the  Railway  Gross  Receipts  Tax  decision.  For  a  recent  case,  see  People  ex 
rel.  R.  R.  Co.  vs.  Campbell,  74  Hun,  210. 

« Philadelphia  S.  S.  Co.  vs.  Pennsylvania,  122  U.  S.  326  (1886).  In  this 
case  the  court  showed  that  the  case  of  Brown  vs.  Maryland  was  really  no 
authority  for  the  decision  in  the  case  of  the  State  Tax  on  Railway  Gross 
Receipts,  decided  fifteen  years  before. 

3  Fargo  vs.  Michigan,  121  U.  S.  230  (1886) ;  Western  Union  Telegraph  Co. 
vs.  Alabama  Board  of  Assessment,  132  U.  S.  472  (1889).  Cf.  Coe  vs.  Errol, 
116  U.S.  517(1885). 

^Ratterman  vs.  Western  Union  Telegraph  Co.,  127  U.  S.  411  (1888). 

»  Maine  vs.  GrandTrunk  R.  R.  Co.,  142  U.  S.  217  (1891).  The  real  party 
to  the  case  was  the  Atlantic  and  St.  Lawrence  R.  R.  Co. 


266 


ESSAYS  IN  TAXATION 


thing  taxed  is  the  franchise,  which  may  be  measured  at  the 
discretion  of  the  legislature  (except  that  when  all  receipts  are 
from  interstate  commerce  the  tax  is  invalid);  while  in  the 
case  of  a  foreign  corporation  the  franchise  cannot  be  taxed,  but 
only  the  business.  Since  the  thing  taxed  in  the  latter  case 
is  the  business,  the  constitutional  provision  is  violated  whenever 
that  business  is  so  extended  as  to  include  interstate  commerce.^ 
The  same  distinction  which  is  observable  in  the  Gross  Re- 
ceipts Tax  cases  has  been  maintained  in  others.  Thus  a  license 
tax  on  foreign  companies  doing  an  interstate  business  is  held 
invalid  because  it  is  a  tax  on  the  privilege  of  doing  interstate 
commerce;  ^  but  a  license  on  a  domestic  corporation  for  boats 
used  in  interstate  commerce  is  valid.^  So,  too,  a  privilege  tax 
upon  every  sleeping  car  belonging  to  a  foreign  corporation  has 
been  declared  unconstitutional  as  a  regulation  of  interstate 
commerce;  ^  but  when  the  sleeping  cars  are  run  wholly  within 
the  state  over  the  line  of  a  domestic  corporation,  the  tax  is  valid. ^ 
Again,  a  tax  proportioned  to  capital  stock  and  dividends  is  valid 
as  to  domestic  corporations  even  though  they  be  engaged  in 
interstate  commerce;^  but  if  the  business  of  a  foreign  corporation 
is  interstate  commerce  exclusively,  the  tax  on  capital  stock  is 
void.^    On  the  other  hand,  even  though  the  tax  be  imposed  on  a 

1  Cf.  Horn  Silver  Mining  Co.  vs.  New  York,  143  U.  S.  305. 

2  United  States  Express  Co.  vs.  Allen,  39  Fed.  Rep.  712;  Leloup  vs.  Port 
of  Mobile,  127  U.  S.  640;  Krutcher  vs.  Kentucky,  141  U.  S.  47. 

3  Wiggins  Ferry  Co.  vs.  East  St.  Louis,  107  U.  8.  365  (1882).  Cf.  Osborn 
vs.  Mobile,  16  Wall.  479  (1872),  where  a  license  fee  was  imposed  on  an  agent 
of  an  express  company  doing  business  in  Mobile. 

*  Pickard  vs.  Pullman  Southern  Car  Co.,  117  U.  S  34  (1886).  It  was  dis- 
tinctly held  that  the  cars  in  question  had  no  Htm  in  the  state  (Tennessee) 
imposing  the  tax. 

»  Gibson  County  vs.  Pullman  Southern  Car  Co.,  42  Fed.  Rep.  512  (1890). 
Whether  the  counties  may  levy  such  a  tax  depends  entirely  upon  the  author- 
ization which  must  be  express,  given  them  by  the  state  law. 

«  People  vs.  Wemple,  117  N.  Y.  136  (1889). 

^People  ex  rel.  Pennsylvania  R.  R.  Co.  vs.  Wemple,  138  N.  Y.  (1893). 
This  was  the  case  of  a  railroad  corporation  whose  line  terminated  without 
the  state,  but  which  had  terminal  facilities  within  the  state  for  the  delivery 
of  passengers  and  freight,  the  sale  of  tickets  and  the  collection  of  dues.  A 
somewhat  similar  case  was  that  of  Gloucester  Ferry  Co.  vs.  Pennsylvania, 
1 14  U.  S.  196  (1885).  Here  the  state  attempted  to  impose  a  tax  on  the  capi- 
tal stock  of  a  New  Jersey  company  having  no  property  in  Pennsylvania 
except  a  wharf  in  Philadelphia.  This  tax  was  held  void,  as  an  interference 
with  interstate  commerce.  Another  similar  case  was  that  of  Norfolk  and 
Western  R.  R.  Co.  vs.  Pennsylvania,  136  U.  S.  114  (1890).  The  railway 
had  no  line  in  the  state,  but  had  an  office  there,  and  traffic  contracts  which 


THE  TAXATION  OF  CORPORATIONS 


267 


foreign  corporation,  if  it  is  assessed  not  on  the  business  itself, 
but  on  the  capital  stock  or  property  according  to  mileage,  and 
if  the  corporate  property  is  actually  situate  in  the  state,  it  will 
be  upheld.^ 

The  law,  therefore,  seemed  to  distinguish  in  part  between 
foreign  and  domestic  companies.  Yet  in  the  Maine  case,  the 
tendency  of  the  court,  although  it  was  expressed  only  in  a  dic- 
tum, seemed  to  be  opposed  to  this  distinction;  and  the  reasoning 
of  the  court  would  tend  to  uphold  a  gross  receipts  tax,  whether 
imposed  on  domestic  or  on  foreign  corporations,  provided  any 
of  the  receipts  be  earned  within  the  state.^  This  legal  reason- 
ing was  also  economically  sound,  for  from  the  economic  point 
of  view  the  distinction  between  domestic  and  foreign  corpora- 
tions is  entirely  indefensible.  Strictly  carried  out,  it  would 
render  substantial  justice  in  taxation  almost  impossible.  If  a 
foreign  corporation  cannot  be  taxed  where  its  earnings  are  re- 
ceived, because  it  is  a  foreign  corporation;  and  if  it  cannot 
be  taxed  by  the  state  of  its  domicile,  because  the  earnings  are 
not  received  there,  it  would  manifestly  evade  its  due  share 
of  the  burden.  But  if  every  state  could  tax  the  receipts  of  any 
corporation,  so  far  as  they  are  actually  earned  within  the  state, 
no  corporation  could  escape  under  the  plea  of  its  foreign  origin, 
and  the  foundations  would  be  laid  for  an  equitable  system  based 
on  interstate  agreement.  The  force  of  the  constitutional  provi- 
sion would,  moreover,  still  be  sufficiently  strong  to  prevent 

made  it  a  part  of  a  system  doing  interstate  business.  A  tax  on  capital 
stock  of  this  corporation  was  held  invalid,  as  interfering  with  interstate 
commerce. 

'  Pullman  Car  Co.  vs.  Pennsylvania,  141  U.  S.  18  (1890);  Pullman  Pal- 
ace Car  Co.  vs.  Assessors,  55  Fed.  Rep.  206  (1893).  Cf.  Telegraph  Co.  vs. 
Massachusetts,  125  U.  S.  530  (1890). 

2  "The  privilege  of  exercising  the  franchises  of  a  corporation  within  a 
state  is  generally  one  of  value,  and  often  of  great  value  and  the  subject  of 
earnest  contention.  It  is  natural,  therefore,  that  the  corporation  should  be 
made  to  pay  some  proportion  of  the  burdens  of  the  government.  As  the 
granting  of  the  privilege  rests  entirely  in  the  discretion  of  the  state,  whether 
the  corporation  be  of  domestic  or  foreign  origin,  it  may  be  conferred  upon 
such  conditions,  pecuniary  or  otherwise,  as  the  state  in  its  judgment  may 
deem  most  conducive  to  its  interests  or  policy.  .  .  .  The  character  of  the 
tax  or  its  vahdity  is  not  determined  by  the  mode  adopted  in  fixing  its 
amount  for  any  specific  period  or  the  times  of  its  payment.  .  .  .  The  rule  of 
apportioning  the  charge  to  the  receipts  of  the  business  would  seem  to  be 
eminently  reasonable,  and  likely  to  produce  the  most  satisfactory  results 
both  to  the  state  and  the  corporation  taxed."  Justice  Field,  in  Maine  vs. 
Grand  Trunk  R.  R.  Co.,  142  U.  S.  217  (1891). 


[" 


268 


ESiiAYS  IN   TAXATION 


unjust  discriminations  against  foreign   commerce  or  foreign 
business. 

More  recent  cases  have  now  definitely  settled  both  the  un- 
tenability  of  the  distinction  between  foreign  and  domestic 
corporations  in  this  matter  and  the  precise  extent  to  which 
gross  receipts  taxation  is  constitutionally  permissible.  In  the 
Wisconsin  case  a  tax  was  sustained  which  made  the  income  of  a 
raih-oad  company  within  the  state,  although  including  inter- 
state earnings,  the  measure  of  the  value  of  the  property.  The 
court  said: 


I 


:( 


"  In  form  the  tax  is  a  tax  on  '  the  property  and  business  of  such 
railroad  corporations  operated  withm  the  state/  computed  upon  cer- 
tain percentages  of  gross  income.  The  prima  facie  measure  of  the 
plaintiff's  gross  income  is  substantially  that  which  was  approved  in 
Maine  vs.  Grand  Trunk  Railway  Co."  * 

Shortly  afterwards,  in  the  Texas  case,  a  tax  of  1%  on  the  gross 
receipts  of  a  domestic  company  was  declared  invalid  on  the 
ground  that  the  tax  was  imposed  on  the  receipts  as  such.  Jus- 
tice Holmes  attempted  to  distinguish  this  case  from  the  Maine 
case  on  the  ground  of  a  difference  between  a  tax  on  property 
and  a  tax  on  commerce.^ 

"  '  By  whatever  name  the  exaction  may  be  called,  if  it  amounts  to  no 
more  than  the  ordinary  tax  upon  property  or  a  just  equivalent  therefor, 
ascertained  by  reference  thereto,  it  is  not  open  to  attack  as  inconsistent 
with  the  Constitution.'  Telegraph  Cable  Co.  v.  Adams,  155  U.  S.  688, 
697.  See  New  York,  Lake  Erie  &  Western  R.  R.  Co.  v.  Penvsylvayiia, 
158  U.S.  431,  438,  439.  The  question  is  whether  this  is  such  a  tax.  It 
appears  sufficiently,  perhaps  from  what  has  been  said,  that  we  are  to 
look  for  a  practical  rather  than  a  logical  or  philosophical  distinction. 
The  State  must  be  allowed  to  tax  the  property  and  to  tax  it  at  its  ac- 
tual value  as  a  going  concern.  On  the  other  hand,  the  State  cannot 
tax  the  interstate  business.  The  two  necessities  hardly  admit  of  an 
absolute  logical  reconciliation.  Yet  the  distinction  is  not  without 
sense.  When  a  legislature  is  trying  sunply  to  value  property,  it  is  less 
likely  to  attempt  to  or  effect  injurious  regulation  than  when  it  is  aim- 
ing directly  at  the  receipts  from  interstate  commerce.  A  practical 
line  can  be  drawn  by  taking  the  whole  scheme  of  taxation  mto  account. 
That  must  be  done  by  this  court  as  best  it  can." 


217. 


1  Wisconsin  &  Michigan  Railway  Co.  vs.  Powers,  191  IT.  S.  379. 

2  Galveston,  Harrisburgh  &  San  Antonio  Ry.  Co.  vs.  Texas,  210  U.  S. 


THE  TAXATION  OF  CORPORATIONS 


269 


In  the  meantime,  this  distinction  between  a  tax  on  property 
and  a  tax  on  commerce  was  strengthened  by  a  number  of  cases 
which  upheld  the  legitimacy  of  a  tax  on  property,  even  if  some 
of  the  property  was  used  in  interstate  commerce.^ 

Finally,  however,  in  1912  the  whole  controversy  was  laid  to 
rest,  in  principle  at  least,  by  two  cases  decided  on  the  same  day. 
In  the  Oklahoma  case,^  a  gross  receipts  tax  of  3%,  levied  in 
addition  to  the  general  property  tax,  was  declared  invalid  be- 
cause clearly  a  tax  on  the  gross  receipts  as  such,  and  therefore 
on  the  receipts  from  interstate  commerce.  On  the  other  hand, 
in  the  Minnesota  case,^  a  tax  of  6%  on  the  gross  receipts  was 
upheld  because  declared  to  be  in  lieu  of  all  taxes  on  the  prop- 
erty of  the  corporation. 

Under  this  decision  the  constitutionality  of  a  gross  earnings 
tax  is  henceforth  indisputable,  provided  only  that  the  earnings 

» The  case  of  Western  Union  Telegraph  Co.  vs.  Mass.,  125  U.  S.  530 
(1887),  which  upheld  a  tax  on  that  proportion  of  the  capital  stock  of  a 
corporation  that  the  state  mileage  bore  to  the  entire  mUeage,  was  applied 
to  a  raUroad  in  C.  C,  C.  &  St.  Louis  Ry.  Co.  vs.  Backus,   154  U.  S.  439 
(1894);  and  to  an  express  company  in  the  Express  Cases,  165  U.  S,  195 
(1897).    These  cases  upheld  the  legality  of  the  so-called  unit  rule.    Again 
while  a  license  tax  on  each  Pulbnan  car  was  declared  invalid  as  an  inter- 
ference with  the  privilege  of  engaging  in  interstate  commerce  in  Pickard 
vs.  Pullman  Southern  Car  Co.,  117  U.  S.  34,  a  tax  on  the  capital  stock  of  a 
similar  company  in  proportion  to  the  mileage  of  the  cars  run  in  the  state 
as  compared  to  the  total  mileage  was  upheld  in  P.  C.  C.  Co.  vs.  Pa.,  141 
U.  S.  18;  and  a  tax  levied  by  Tennessee  upon  "each  sleeping  car  doing 
business  withm  the  state"  for  purely  intra-state  business  was  upheld  on 
the  ground  that  there  was  no  compulsion  to  do  this  business     Allen  vs 
Pullman  Co.,  191  U.  S.  171  (1903).    On  other  hand,  the  Kansas,  tax  of 
1/10  of  1%  on  the  authorized  capital  stock  of  a  sunilar  company  was  de- 
clared inadmissible  as  a  burden  on  interstate  commerce.     Pullman  Co 
vs.  Kansas,  216  U.  S.  56  (1910).    Cf.  Western  Union  Tel.  Co.  vs.  Kansas," 
216  U.  S.  1  (1910).    Later  cases  seek  to  make  distinctions  based  on  the 
actual  fact  whether  the  tax  is  a  real  burden  on  interstate  commerce     In 
Lusk  vs.  Botkin,  240  U.  S.  236  (1916)  and  Kansas  City,  M.  and  B  r'  Co 
vs.  Stiles,  242  U.  S.  Ill  (1916),  Kansas  taxes  on  a  foreign  raUroad  com- 
pany were  sustained,  and  in  St.  Louis  S.  W.  Ry.  Co.  vs.  Arkansas,  235 
U.  S.  350  (1914)  a  similar  Arkansas  law  was  upheld.    On  the  other  hand 
in  Looney  vs.  Crane  Co.,  245  U.  S.  178  (1917),  the  Western  Union  case  of 
1910  was  followed.    For  an  elaborate  discussion  of  the  late  cases,  which 
does  not,   however,  succeed  in  presenting  a  very    clear  picture  of  the 
principles  underlying  the  Supreme  Court  decisions,  see  T.   R.  Powell 
Indirect  Encroachment  on  Federal  Authority  by  the  Taxing  Powers  of  the 
States,  referred  to  supra,  p.  264. 

2  Meyer,  Auditor,  vs.  Wells,  Fargo  &  Co.,  223  U.  S.  298. 

»U.  S.  Express  Co.  vi.  Minnesota,  223  U.  S.  335. 


I 


270 


ESSAYS  IN  TAXATION 


tax  takes  the  place  of  the  property  tax  and  is  not  levied  as  an 
addendum  to  it.^  We  may  indeed  criticize  from  an  economic 
point  of  view  a  decision  which  declares  a  tax  on  earnings  to  be  a 
tax  on  property  or  equivalent  to  it.  But  we  must  none  the  less 
applaud  the  ingenious  way  in  which  the  Supreme  Court  has 
extricated  itself  from  a  difficult  position.  It  must  be  remem- 
bered that  the  Supreme  Court  was  dealing  with  a  situation 
where  the  ordinary  tax — on  individuals  and  corporations  alike — 
was  the  general  property  tax;  and  the  problem  presented  was,  if 
possible,  to  uphold  a  state  earnings  tax  in  terms  of  a  property 
tax  ''or  its  equivalent."  This  problem  the  court  has  successfully 
solved,  and  the  way  is  thus  open  for  the  development  of  a 
proper  system  of  corporate  taxation  untrammelled,  in  one 
important  respect  at  least,  by  the  fancied  limitations  of  a 
federal  constitution.  And  when  a  little  later  the  question  of  the 
constitutionality  of  a  state  tax  on  corporate  incomes  or  net 
earnings  arose,  the  court  had  no  difficulty  in  upholding  such  a 
tax  as  in  no  way  contravening  the  commerce  clause  of  the 
constitution.'- 

A  tax  on  corporate  earnings,  according  to  a  law  properly 
drawn,  is  therefore  not  only  economically  correct  but  legally 
unassailable. 

The  only  question  that  still  remains  is  whether,  under  these 
decisions  a  local  tax  on  the  real  property  of  corporations  will 
be  permissible  contemporaneously  with  a  state  tax  on  earnings. 
It  is  to  be  hoped — and,  may  we  add,  to  be  expected — that 
when  this  question  is  presented  the  court  will  take  the  view 
that  a  local  tax  on  real  estate  is  in  no  way  to  be  confounded, 
or  to  be  regarded  as  inconsistent,  with  a  state  tax  on  earnings. 
When  once  this  question  is  decided  correctly,  the  progress  of 
corporate  tax  reform  will  be  assured. 

This,  therefore,  is  our  general  conclusion;  but  it  does  not  yet 
exhaust  the  problem  of  corporate  taxation.  We  are,  in  fact, 
only  on  the  fringe  of  the  difficulties.  Let  us  proceed  in  the  next 
chapter  to  study  some  of  the  more  complicated  questions. 

1  Later  decisions  along  the  same  general  lines  are  U.  S.  Express  Co.  vs. 
Minn., 246 U.S. 450  (1918)  and  Cudahy  Packing  Co.  vs.  Minn.,  246  U.  S. 
456  (1918).  Cf.  also  Ohio  Tax  Cases,  232  U.  S.  576  (1914),  which  upheld 
a  state  tax  on  gross  receipts  from  intra-state  business,  even  though  the 
tax  was  not  in  lieu  of  a  property  tax. 

2  U.  S.  Glue  Co.  vs.  Oak  Creek,  247  U.  S.  321  (1918),  affirming  the  con- 
stitutionality of  the  Wisconsin  income  tax  law. 


CHAPTER  VIII 


THE  TAXATION  OF  CORPORATIONS 


III 


COMPLICATIONS  AND  CONCLUSIONS 

The  discussion  of  the  taxation  of  corporations  would  be 
incomplete  without  an  examination  of  the  various  phases  of 
double  taxation.  This  is  the  more  necessary  for  the  reason 
that  no  attempt  at  a  thorough  analysis  has  ever  yet  been  made. 
Yet  the  problems  that  hinge  upon  this  particular  question  are 
so  especially  important  in  the  United  States  as  to  demand  the 
most  serious  attention. 

In  a  former  chapter^  we  have  already  discussed  some  of 
the  general  aspects  of  double  taxation.  Let  us  now  attempt 
to  develop  the  principles  in  the  light  of  actual  practice. 

There  are  in  reality  no  less  than  five  different  forms  of  double 
taxation  in  the  case  of  corporations : — 

1.  Double  taxation  of  property  and  of  debts,  or  of  income 
and  of  interest  on  debts. 

2.  Double  taxation  of  property  and  of  income. 

3.  Double  taxation  of  property  and  of  stock. 

4.  Double  taxation  arising  from  conflicts  of  jurisdiction. 

5.  Double  taxation  of  the  corporation  and  of  the  holders 
of  stock  or  bonds. 

I.  Taxation  of  Property  and  of  Debts 

This  first  case  need  not  detain  us  long.  The  only  illustra- 
tions in  the  United  States  are  found  under  the  general  property 
tax,  which  we  have  discarded  as  the  basis  of  corporation  taxa- 
tion. In  many  of  the  states  corporate  debts  must  be  considered 
in  estimating  the  value  of  the  capital  stock.  In  New  York,  as 
regards  local  taxation,  the  indebtedness  must  be  taken  into 

^  Supra,  chap.  iv. 
271 


272 


ESSAYS  IN  TAXATION 


I 


III 


11 

Iff 


h 


I 


account  in  assessing  the  capital  stock;  but  after  the  valuation 
has  been  fixed,  the  amount  of  the  indebtedness  cannot  be  de- 
ducted. ^  If  the  capital  stock  is  of  no  value  because  the  indebted- 
ness exceeds  the  assets,  it  should  not  be  assessed.^  In  the  case 
of  foreign  corporations,  however,  which  are  taxable  on  the 
amounts  invested  in  the  state,  it  has  been  held  that  the  law  does 
not  contemplate  the  deduction  of  debts.3 

We  have  already  pointed  out  that  there  is  really  no  injustice 
in  not  exempting  corporate  indebtedness.^  The  mortgage  bonds 
of  a  corporation  are  really  a  part  of  the  working  capital.  Cor- 
rect policy  demands  the  taxation  of  corporate  bonds  as  well  as 
of  stock,  of  loans  as  well  as  of  share  capital.  To  tax  corporate 
debts  may,  indeed,  be  called  double  taxation  in  so  far  as  the 
tax  on  both  stock  and  debt  is  paid  out  of  the  same  income;  but 
if  so,  it  is  double  taxation  of  a  perfectly  legitimate  kind.  It  is 
here  that  the  principles  of  individual  and  corporate  taxation 

diverge.  ; 

Some  of  the  American  commonwealths,  as  California,  Con- 
necticut, Maryland  and  Pennsylvania,  recognize  this  distinction 
between  the  taxation  of  individuals  and  that  of  corporations, 
by  permitting  the  deduction  of  indebtedness  from  the  property 
of  individuals  but  refusing  a  like  deduction  in  the  case  of  corpo- 
rate property.  In  California,  the  courts  held  distinctly  that 
what  would  be  double  taxation  in  the  case  of  individuals  is 
permissible  in  the  case  of  corporations.^  Some  of  the  Swiss 
cantons,  like  St.  Gall,  Zurich  and  Ticino,  observe  the  same 
distinction.^ 

Perhaps  more  interesting  and  probably  of  greater  future 
importance  in  the  United  States  is  the  other  phase  of  this  ques- 
tion of  the  taxation  of  indebtedness — double  taxation  of  income 
and  of  interest  on  debt.  While  the  true  theory  of  income  taxa- 
tion in  the  case  of  individuals  demands  the  deduction  of  interest 
on  debts,  it  has  already  been  shown  that  in  the  case  of  corpora- 
tions the  interest  paid  on  mortgage  bonds  must  be  included  in 
the  taxable  income.  Taxation  of  interest  on  corporate  debt  is 
not  double  taxation,  because  the  coupons,  like  the  dividends, 

» 1  Thomp.  and  C.  635;  100  N.  Y.  597;  112  N.  Y.  565. 

2  People  vs.  Commissioners,  31  Hun,  32  (1st  Department). 

»  People  vs.  Barker,  141  N.  Y.  118. 

*Cf.  supra,  p.  106. 

6  Central  Pacific  R.  R.  Co.  vs.  Board  of  Equalization,  60  Cal.  35. 

*  Schanz,  EHe  Steuern  der  Schiveiz,  ii.,  p.  338;  ii.,  p.  435;  iv.,  p.  281. 


THE  TAXATION  OF  CORPORATIONS 


273 


are  integral  parts  of  the  income;  because  both  bonds  and  stock 
together  form  what  is  really  the  working  capital  from  which  the 
income  is  derived.  This  question  has  already  been  discussed; 
but  the  difference  in  economic  significance  between  most  cor- 
porate bonds  and  ordinary  individual  debts  must  be  continually 
borne  in  mind. 

II.  Taxation  of  Income  and  of  Property 

This  second  form  of  double  taxation,  like  the  first,  involves 
no  very  complicated  question;  nor  does  the  solution  present 
many  difficulties.  Is  it  permissible  to  tax  a  corporation  both 
on  its  property  and  on  its  net  receipts  or  income?  If  corpora- 
tions are  put  upon  the  same  plane  as  individuals,  the  simulta- 
neous taxation  of  the  property  and  of  the  income  from  the  prop- 
erty works  no  injustice.  As  we  have  seen  above,^  if  all  are 
treated  alike  and  if  the  tax  is  uniform,  there  is  really  no  cause 
for  complaint. 

So  far  as  corporations  are  concerned,  tliis  was  until  recently 
not  a  matter  of  practical  importance.    The  only  case  in  which 
this  special  question  formerly  arose  was  under  the  laws  of 
Alabama,  now  repealed,  which  provided  for  the  taxation  not 
only  of  corporate  property  but  also  of  the  corporate  income 
during  the  preceding  year.^    Such  taxation  was  upheld  on  the 
ground  that  it  was  only  apparently  double  taxation.'^    What 
the  court  meant  was,  of  course,  not  that  it  was  not  double  tax- 
ation, but  that  it  was  not  invalid  or  economically  unsound  taxa- 
tion.   In  this  the  court  was  correct,  for  the  law  applied  equally 
to  all  individuals  and  to  corporations.    Now,  however,  under  the 
new  (1911)  income  tax  of  Wisconsin  which  is  deemed  to  take  the 
place  of  the  tax  on  intangible  personalty,  henceforth  exempted, 
corporations  are  still  taxable  on  their  real  estate  and  tangible 
personalty  as  well  as  on  their  income,  but  they  are  permitted  to 
deduct  from  their  taxable  income  all  sums  paid  for  taxes  in  any 
part  of  the  country  upon  the  source  from  which  the  income  is 
derived.    Moreover,  all  public-service  corporations  (as  well  as 
insurance  companies)  which  pay  taxes  directly  to  the  state  are 
exempt  from  income  tax  altogether. 

1  Supra,  p.  100. 

.Z^^t^^^^  ""^  ^^^'  22*  1866;  Feb.  19,  1867;  Dec.  31,  1868;  March  19, 
1876;  March  6,  1876. 

'Board  of  Review  vs.  Montgomery  Gas  Light  Co.,  64  Ala.  276.    Cf.  Lett 
vs.  Hubbard,  44  Ala.  593. 


274 


ESSAYS  IN  TAXATION 


At  present  in  the  United  States  apart  from  the  situation  in 
Wisconsin,  no  attempt  is  made  to  tax  simultaneously  both 
corporate  property  and  corporate  income.  The  nearest  ap- 
proach to  the  practice  is  the  system  in  some  states  hke  Mary- 
land, Pennsylvania  and  New  York  of  taxing  the  capital  stock 
and  also  the  gross  receipts  of  certain  corporations.  No  objec- 
tion has  been  raised  to  these  taxes  on  the  score  of  double  taxa- 
tion; nor  is  it  Ukely  that  such  an  objection  will  be  sustained.^ 
One  might  as  well  object  to  a  combination  of  direct  and  indirect 
taxes  as  involving  dupUcate  taxation,  on  the  ground  that  all 
taxes  are  in  the  last  resort  paid  (or  presumed  to  be  paid)  out  of 
annual  income.  So  agam,  in  some  of  the  Southern  and  Western 
states,  as  we  know,  corporations  are  taxed  on  their  business,  by 
license  or  occupation  taxes,  and  again  on  their  receipts,  and  this 
practice  is  upheld  as  perfectly  valid.^  This  second  form  of 
double  taxation  is  entirely  proper. 

The  classic  home  of  double  taxation  of  this  sort  is  Switzer- 
land. Baselstadt,  for  instance,  taxes  corporations  one  per 
mill  on  the  paid  up  capital,  a  quarter  of  one  per  mill  on  the 
capital  not  yet  paid  up,  and  one  per  cent  on  the  total  net  income 
from  all  sources.^  In  Baselland  corporations  are  taxed  on  their 
general  property  and  again  on  their  total  profits,  with  the  ex- 
ception that  when  any  of  the  profits  consist  of  interest  on  capital 
the  profits  are  not  taxed  if  the  capital  has  already  been  assessed. "* 
Many  of  the  cantons,  however,  seek  to  avoid  the  simultaneous 
taxation  of  property  and  income  by  an  arrangement  of  the 
following  sort:  While  the  law  provides  for  the  assessment  of 
both  property  and  income,  a  deduction  is  made  in  the  case 
of  the  income  tax  for  so  much  of  the  income  as  is  supposed  to 
represent  the  actual  profits  of  the  capital  already  taxed.  The 
proportion  thus  deducted  is  fixed  in  accordance  with  the  esti- 
mated current  rate  of  interest,  ranging  from  four  per  cent  in 
Thurgau  and  Grisons  to  five  per  cent  in  Zug,  Schaffhausen, 
Ticino,  Vaud  and  Zurich.    The  federal  government  deducts  five 

1  In  U.  S.  Electric  Power  and  Light  Co.  vs.  State,  79  Md.  63,  a  vigorous 
objection  has  now  been  made,  but  the  objection  was  not  sustained  by  the 
court. 

2  Cf.  95  Mo.  360,  where  the  court  holds  that  it  is  not  dupUcate  taxa- 
tion. 

3  Law  of  1889,  §§  2,  3.  Schanz,  Die  Steuem  der  Schweiz,  ii.,  p.  84;  v., 
p.  50.  As  to  the  Swiss  conditions  mentioned  in  this  paragraph,  c/.  the 
warning,  supra,  p.  260,  note. 

*  Schanz,  op.  cit.,  i.,  p.  55;  v.,  p.  35. 


THE  TAXATION  OF  CORPORATIONS 


275 


per  cent.  I  This  principle  has  now  also  been  applied  in  Germany. 
In  Prussia,  since  1891  the  income  tax  is  assessed  on  corporate 
income,  after  deducting  a  sum  equal  to  three  and  a  half  per 
cent  of  the  paid  up  capital.^  In  Baden  and  Wiirtembcrg  the 
deduction  is  limited  to  3%  and  cannot  exceed  the  amount  of 
dividends  declared.^  Bern  and  St.  Gallen  are  the  only  Swiss 
cantons  which  attempt  to  draw  a  sharper  line  by  levying  the 
property  tax  solely  on  the  corporate  real  estate,  but  subjecting 
all  the  other  property  to  an  mcome  tax.^  In  St.  Gallen  the  real 
estate  tax  is  for  local,  the  income  tax  for  cantonal  purposes. 

The  solution  of  the  supposed  diflSculty  attempted  by  the 
Swiss  and  the  German  commonwealths  is,   however,   not  a 
happy  one.     The  deduction  from  income  of  the  three  or  five 
per  cent,  assumed  to  represent  the  earnings  of  property  in- 
volves a  misconception.     It  is  impossible  to  say  how  much 
of  the  income  represents  earnings  of  capital  and  how  much 
represents  the  other  ingredients  of  profit.     We  are  brought 
face  to  face  with  complicated  questions  of  economic  theory— 
with   the  distinction  between  interest  and   profits,  and  the 
separate  ingredients  of  profits.    A  discussion  of  these  questions 
lies  beyond  the  province  of  this  essay.    But  it  may  be  confi- 
dently asserted  that  if  a  railway  corporation  with  no  bonded 
indebtedness  and  a  capital  of  one  million  dollars  earns  seventy- 
five  thousand  dollars,  it  is  impossible  to  maintain  that  fifty 
thousand  dollars  represents  the  earnings  of  the  property  and 
the  remainder  the  earnings  of  the  management.    From  one  point 
of  view  all  such  profits  are  profits  on  capital  or  property.    An  in- 
dividual can  indeed  obtain  a  professional  income  without  any 
capital;  but  in  the  case  of  a  business  with  capital  invested,  it  is 
impossible  to  say  how  much  of  the  profits  are  due  to  the  capital, 
how  much  to  the  personal  management.    Without  the  capital 
there  would  be  no  profits  at  all,  because  there  would  be  no  busi- 
ness.   Therefore,  in  taxing  profits  we  are  really  taxing  property, 
or  rather  the  proceeds  of  property.     To  segregate  a  part  of 
these  proceeds  and  to  say,  as  do  the  Swiss  cantons,  that  only 
this  particular  part  represents  the  income  from  the  property, 
is  an  entirely  arbitrary  proceeding. 

*  Schanz,  op.  cit.,  i.,  p.  56. 

^  Einkommensteuergesetz  vom  24  Juni,  1891,  §  16. 

'  L.  Blum,  Die  steuerliche  Ausnutzung  der  Aktiengesellschaftm  in  Deutsch- 
land,  Stuttgart,  1911,  pp.  48,  52. 

*  Schanz,  op.  dt.,  ii.,  pp.  318,  368;  iii.,  p.  292. 


276 


ESSAYS  IN  TAXATION 


Again,  it  cannot  be  contended  that  even  this  four  or  five 
per  cent  of  income  exempted  by  the  Swiss  laws  represents  only 
the  interest  on  the  capital,  and  that  the  remainder  of  the 
income  represents  the  earnings  of  management.  Under  no 
theory  of  economic  profits  can  the  surplus  above  current  in- 
terest be  entirely  dissociated  from  capital.  Even  granting 
that  a  sharp  line  can  be  drawn  between  interest,  earnings  of 
management  and  profits,  it  still  remains  incorrect  to  confine 
the  proceeds  of  capital  to  interest  alone.  It  is  thus  inadmissible 
to  say  that  in  taxing  income  only  on  the  surplus  above  four  or 
five  per  cent  of  the  taxable  capital  we  avoid  taxing  both  property 
and  income. 

The  Swiss  system  has  indeed  a  very  decided  significance  in 
connection  with  an  entirely  different  matter,  viz.,  the  question 
of  funded  or  unfunded  income.  But  as  regards  the  point 
now  under  discussion  it  is  evident  that  the  Swiss  cantons  do 
not  really  succeed  in  avoiding  double  taxation.  As  we  have 
seen,  however,  it  is  a  form  of  double  taxation  which  is  in  itself 
legitimate  if  applied  equally  to  all  taxpayers. 

III.  Taxation  of  Property  and  of  Stock 

This  third  form  of  duplicate  taxation  must  not  be  under- 
stood to  refer  to  the  taxation  of  shares  of  stock  in  the  hands  of 
individuals.  That  is  a  different  problem,  and  falls  under  an- 
other heading,  to  be  discussed  below.  The  point  here  to  be 
I  discussed  is  this:  Is  it  permissible  to  tax  the  corporation  on 
its  property  and  again  on  its  capital  stock? 

The  answer  is  plain.  Manifestly  not,  if  the  corporate  stock- 
can  be  regarded  as  representing  actual  property.  We  have, 
indeed,  seen  that  it  is  a  mistake,  economically,  to  say,  as  do 
some  of  our  courts,  that  the  entire  property  of  a  corporation 
is  identical  with  its  capital  stock.  This  point  has  been  brought 
out  so  well  in  a  Massachusetts  case,  and  is  so  generally  mis- 
understood, that  it  may  be  wise  to  make  a  more  extended  quota- 
tion from  the  decision: — 

"  The  market  value  of  the  shares  of  a  corporation  .  .  .  does  not 
necessarily  indicate  the  actual  value  or  amount  of  property  which 

(a  corporation  may  own.  The  price  for  which  all  the  shares  would 
sell  may  greatly  exceed  the  aggregate  of  the  corporate  property,  or  it 
may  fall  very  far  short  of  it.  Undoubtedly  the  amount  of  property 
belonging  to  a  corporation  is  one  of  the  considerations  which  enter 
into  the  market  value  of  its  shares;  but  such  market  value  also  em- 


THE  TAXATION  OF  CORPORATIONS 


277 


braces  other  essential  elements.  It  is  not  made  up  solely  by  the  valua- 
tion or  estimate  which  may  be  put  on  the  corporate  property,  but  it 
also  includes  the  profits  and  gains  which  have  attended  its  operations, 
the  prospect  of  its  future  success,  the  nature  and  extent  of  its  corporate 
rights  and  privileges,  and  the  skill  and  ability  with  which  its  business 
is  managed.  In  other  words,  it  is  the  estimate  put  on  the  potentiahty 
of  a  corporation,  on  its  capacity  to  avail  itself  profitably  of  the  franchise, 
and  on  the  mode  in  which  it  uses  its  privileges  as  a  corporate  body, 
which  materially  influences  and  often  controls  its  market  value."  ^ 

While  it  is  true,  therefore,  that  capital  stock  and  total  prop- 
erty are  not  interchangeable  terms,  it  cannot  be  denied  on  the 
other  hand  that  the  capital  stock  represents  at  all  events  a 
part  of  the  property,  or  rather  that  the  corporate  property  is 
one  of  the  elements  that  contribute  to  the  value  of  the  capital 
stock.  So  far  as  this  is  true,  the  simultaneous  taxation  of 
corporate  property  and  corporate  stock  involves,  to  this  extent 
at  least,  duplicate  taxation  of  an  unjust  character. 

Unfortunately,  there  is  no  uniformity  in  the  legal  decisions 
on  this  point.  While  the  majority  of  the  commonwealths  hold 
taxation  of  this  kind  to  be  unjust,  Pennsylvania  has  pronounced 
it  vafid.    In  a  celebrated  case  the  court  used  this  language: — 

"  Double  taxation  has  never  been  considered  unlawful  in  this  state. 
The  real  and  personal  property  of  a  corporation  may  be  taxed,  although 
it  pays  a  tax  on  the  stock  which  purchased  it.  The  power  of  the  legis- 
lature is  as  ample  to  tax  twice  as  to  tax  once,  and  it  is  done  daily  as 
all  experience  shows.  Equality  of  taxation  is  not  required  by  the 
constitution*!''' 

Such  a  decision  may  be  correct  legally,  but  beyond  all 
doubt  it  is  unsound  economically.  Equality  of  taxation  may 
not  be  required  by  the  constitution  of  Pennsylvania,  but  it 
is  one  of  the  first  laws  in  the  science  of  finance.  Abandon  i 
equality,  and  you  throw  the  door  wide  open  to  all  kinds  of 
glaring  abuses.  The  theory  as  formulated  by  the  Pennsylvania 
courts  cannot  possibly  be  upheld  from  the  scientific  standpoint. 

The  Pennsylvania  courts,  however,  hold  that  so  far  as  the 
capital  stock  of  a  domestic  corporation  represents  tangible 
property  outside  of  the  state,  it  is  not  taxable.^  Further,  it 
has  also  been  decided  that  the  real  estate  of  a  corporation, 

^  Commonwealth  vs.  Hamilton  Manufacturing  Co.,  12  Allen,  303. 

*  Pittsburgh  etc.,  R.  R.  Co.  vs.  Pennsylvania,  66  Pa.  State,  77.  Cf.  Lacka- 
wanna Iron  Co.  vs.  Luzerne  County,  42  Pa.  State,  424. 

*  101  Pa.  State,  119;  41  Legal  Intelligencer,  125. 


278 


ESSAYS  m  TAXATION 


4 


being  part  of  its  capital  stock  and  paying  state  taxes,  is  not 
locally  taxable.^  Finally,  in  another  case  it  has  been  held  that 
so  far  as  the  property  of  a  corporation  is  essential  to  the  exercise 
of  its  corporate  franchise,  it  is  included  in  the  capital  stock  and 
is  not  taxable.  The  law  will  not  subject  it  to  duplicate  taxation 
by  mere  inference.^  Thus  Pennsylvania  is  gradually  abandon- 
ing its  earher  decisions. 

Far  wiser  from  the  very  beginning  were  the  Maryland  courts, 
which  held  that  all  laws  must  be  so  construed  as  to  avoid  double 
taxation  of  this  kind ;  and  that,  since  in  their  opinion  the  capital 
stock  of  a  corporation  represents  the  corporate  property,  the 
payment  by  the  corporation  of  a  tax  on  capital  stock  necessarily 
exempts  all  the  corporate  property.^  In  this  broad  form  the 
decision  is  perhaps  open  to  criticism  because  of  the  complete 
identification  of  capital  stock  with  corporate  property;  but  as 
regards  the  point  at  issue  here,  it  is  correct.  To  tax  corporations 
simultaneously  on  their  stock  and  on  their  property  is  inde- 
fensible. A  few  commonwealths,  like  Alabama,  Illinois,  In- 
diana, Vermont  and  (for  local  purposes)  New  York,  have  now 
recognized  this  principle  in  their  statutes,  deducting  from  the 
value  of  the  capital  stock  the  value  of  the  realty  or  of  both  the 
real  and  personal  property  taxed.^ 

On  the  other  hand,  the  apparently  similar  statute  of  Mas- 
sachujsetts,  which  taxes  corporations  on  their  capital  stock  less 
the  value  of  the  real  estate  and  machinery,^  is  open  to  criticism 
for  another  reason.  According  to  the  Massachusetts  law, 
corporations  are  taxable  by  the  local  bodies  on  their  real  estate 
and  machinery,  but  at  a  rate  equivalent  to  the  combined  rate 
for  local  and  state  purposes.  Thej'  are  then  taxable  by  the 
state  on  the  value  of  their  capital  stock,  deducting  the  value 
of  the  real  estate  and  machinery;  but  this  state  tax  is  fixed  at  a 
rate  equivalent  to  the  combined  local  and  state  rate  on  gen- 

1  7  Lane,  317. 

» 148  Pa.  State,  162;  148  Pa.  State,  282.    See  also  145  Pa.  State,  96. 

'  County  Commissioners  vs.  National  Bank,  48  Md.  117.  Cf.  State  vs. 
Sterling,  20  Md.  520;  State  vs.  R.  R.  Co.,  40  Md.  22. 

*  Ala.  Code,  §  453,  sec.  8;  111.  Rev.  Stat.,  chap.  120,  §  3;  Ind.  Laws  of 
1891,  chap.  4;  New  York  Laws  of  1857,  chap.  456,  §  3,  vol.  2,  p.  1;  Vt.  Rev. 
Laws,  §  288.  In  New  York,  as  we  know,  corporations  are  locally  taxable 
on  their  realty  and  their  capital  stock,  deducting  the  amount  invested  in 
real  estate.  The  earlier  Maryland  provision  to  this  effect  (Public  General 
Laws,  art.  81,  §§  84,  85,  141,  144),  has  now  been  abandoned.  See  103  Md 
293. 

*  Mass.  Pub.  Stat.,  chap.  13,  §  40. 


THE  TAXATION  OF  CORPORATIONS 


279 


eral  property.     While,  therefore,  Massachusetts  avoids  double 
taxation  of  both  property  and  stock,  it  does  not  solve  the 
problem  of  affording  the  commonwealth  government  an  ade- 
quate revenue.    According  to  the  theory  elsewhere  elaborated 
in  these  chapters,  corporations  should  always  be  locally  taxable 
on  their  realty;  but  the  commonwealth  tax  should  be  levied 
on  the  total  income,  or  on  the  total  property,  without  any 
deductions  (except  those  arising  from  considerations  of  inter- 
state comity  and  equity,  to  be  discussed  below).    The  whole 
treatment  of  double  taxation  is  here  based  on  the  assumption 
that  the  tax  is  levied  by  administrative  units  of  the  same 
grade,  whether  state  or  local  divisions.     It  manifestly  does 
not  apply  to  cases  where  one  tax  is  levied  by  the  common- 
wealth, and  another  similar  or  different  tax  is  levied  by  the 
county  or  city,  as  in  Massachusetts.    Otherwise  we  should  be 
forced  to  the  conclusion  that  the  property  tax  always  involves  a 
double,  triple  or  quadruple  taxation  so  far  as  state,  county,  town 
and  village  levy  different  rates  on  the  same  property.    This  is, 
however,  only  a  juggle  with  words;  such  taxation  is  not  in  the 
scientific  sense  double  taxation.   Strictly  speaking,  therefore,  the 
Massachusetts  principle,  while  ostensibly  sound,  is  really  incor- 
rect.   So  far,  however,  as  it  attempts  to  solve  another  problem — 
that  of  the  division  of  the  tax  between  the  place  where  the  corpo- 
ration carries  on  its  business,  and  the  place  where  the  stockholder 
resides — the  law  is  deserving  of  consideration.    But  that  is  a 
point  which  belongs  properly  to  one  of  the  subsequent  sections. 
In  Switzerland,  we  find,  in  the  few  cases  where  both  tangible 
property  and  capital  are  assessed,  that  the  value  of  the  taxable 
property  is  deducted  from  the  corporate  capital.     Thus  the 
constitution  of  1885  in  Aargau  provides  for  the  taxation  of  the 
corporate  real  estate  for  both  commonwealth  and  local  purposes, 
the  value  of  the  realty  being  then  deducted  from  the  capital 
stock. ^    The  same  custom  prevails  in  Schaffhausen.^    In  Ger- 
many, Saxony  and  two  of  the  smaller  states  are  the  only  ones 
which  permit  corporations  to  deduct  from  their  taxable  property 
not  only  their  debts  but  also  the  par  value  of  their  capital 
stock.^    The  Swiss  tendency,  Hke  the  American,  is  gradually 
coming  to  be  in  accord  with  the  sounder  principles. 

1  Schanz,  Die  Steuem  der  Schweiz,  ii.,  p.  239.    Cf.  the  warning  above 
on  page  260,  note  1. 

2 /6id.,  ii.,  p.  170,  note  1. 

'  L.  Blum,  Die  steuerliche  Ansnutzung  der  Aktiengesellschaften,  p.  128. 


I 


280 


ESSAYS  IN  TAXATION 


We  come  now  to  the  most  important  aspects  of  double  tax- 
ation—the fourth  and  fifth  forms.  Here  we  have  the  benefit 
of  a  wide  European  experience.  In  the  phases  of  dupHcate 
taxation  hitherto  treated  we  can  learn  very  little  from  Europe, 
because  in  no  European  state  except  Switzerland  and  to  a 
minor  extent  in  Germany  are  corporations  taxed  on  their 
property  as  a  whole;  and  in  both  Switzerland  and  Germany, 
as  we  know,  the  entire  question  of  corporation  taxation  is  in  a 
very  primitive  and  unsatisfactory  stage.  But  the  problems 
that  we  now  take  up  present  themselves  m  Europe  as  well  as  in 
the  United  States,  and  have  there  received  in  some  respects 
extended  consideration,  although  they  have  not  yet  been  suc- 
cessfully solved. 

IV.  Double  Taxation  due  to  Conflicts  of  Jurisdiction 

This  fourth  form  of  duplicate  taxation  appears  in  connection 
with  almost  every  method  of  corporate  taxation.  It  is  so  com- 
prehensive that  it  will  be  advisable  to  discuss  the  subject 
under  four  chief  headings: — 

1.  Interstate  taxation  of  corporate  property. 

2.  Interstate  taxation  of  stock  and  bonds  or  of  dividends 
and  interest. 

3.  Interstate  taxation  of  non-resident  stockholders  or  bond 
holders. 

4.  Interstate  taxation  of  corporate  receipts  or  income. 

1.  Interstate  taxation  of  corporate  property.  The  difficulty 
here  arises  in  connection  with  the  taxation  of  personal  property. 
In  the  case  of  real  estate  the  rule  universally  adopted  in  the 
United  States  is  that  the  property  should  be  taxed  where  it  is 
situated,  and  there  is  accordingly  no  chance  for  interstate  com- 
plications. But  in  the  case  of  personalty  the  great  problem  is 
that  of  situs.  Should  the  personalty  be  taxed  where  it  is  situated 
or  should  it  follow  the  domicile  of  the  owner?  The  legal  con- 
ditions in  the  United  States  are  most  unsatisfactory. 

We  have  seen  in  another  place  ^  that  the  American  states 
waver  between  the  principles  of  situs  and  of  mobilia  personam 
sequuntur, —tha,t  is,  some  tax  only  the  personalty  actually 
situated  in  the  state;  while  others  tax  all  the  personalty,  no 
matter  where  situated,  of  a  resident.    The  same  piece  of  per- 

*  Supra,  p.  114. 


THE  TAXATION  OF  CORPORATIONS  281 

sonal  property  may  therefore  be  taxed  in  two  states.     The  f 
obvious  result,  of  course,  is  double  taxation  of  a  nature  which 
cannot  possibly  be  justified. 

In  the  case  of  corporations,  we  are  confronted  by  precisely 
the  same  difficulties,  for  corporate  property  is  treated  in  the 
main  like  that  of  individuals.    It  is  entitled  to  the  same  exemp- 
tions and  subject  to  the  same  conditions.     It  will  be  readily 
perceived,  however,  with  what  difficulties  the  problem  is  beset 
when,  as  is  usually  the  case,  the  personalty  of  a  corporation  is 
assessed  at  its  place  of  business  as  the  legal  situs.    In  many 
states,  like  Michigan,  Pennsylvania  and  New  York,  it  has 
been  held  not  permissible  to  tax  corporations  for  property— or 
at  all  events  for  tangible  property— outside  the  state;  ^  and  in 
South  Carolina  the  tax  is  specifically  Umited  to  corporate  prop- 
erty within  the  State.^    In  other  cases  it  has  been  held  that  the 
movable  property  of  a  corporation  in  use  in  other  states  is 
taxable  only  in  the  state  of  the  corporation's  domicile.^     In 
Pennsylvania,  it  has  been  held  that  corporate  property,  con- 
sisting of  dredges,  etc.,  not  permanently  located  anywhere, 
may  be  taxed  m  the  state  of  the  corporation's  domicile  as  part 
of  the  stock.4    Some  states,  like  New  York  and  California, 
apply  the  same  rule  to  corporate  as  to  individual  property,  and 
seek  to  avoid  double  taxation  of  this  kind.     In  New  York, 
in  order  to  exempt  the  personal  property  of  a  corporation  be- 
cause it  is  outside  of  the  state,  the  change  of  location  must 
be  permanent  and  unequivocal.^    But  in  most  of  the  states 
the  rule  mobilia  personam  sequuntur  is  applied,  and  domestic 
corporations,  at  all  events,  are  taxed  on  their  whole  prop- 
erty.^   In  the  case  of  foreign  corporations,  however,  it  is  fast 

1  State  Treasurer  ex  ret.  vs.  Auditor-General,  46  Mich.  224;  Graham  vs. 
Township  of  St.  Joseph,  67  Mich.  652. 

2  S.  C.  Rev.  Stat.  chap.  12,  sec.  28.  For  other  cases,  see  Commonwealth 
vs.  Railroad  Co.,  145  Pa.  State,  96,  distinguishing  Commonwealth  vs.  Dredg- 
ing Co.,  122  Pa.  State,  386;  Commonwealth  vs.  Westinghouse  Air  Brake 
Co.,  151  Pa.  State,  276;  Commonwealth  vs.  St.  Bernard  Coal  Co.,  9  South- 
western Reporter,  709  (Ky.). 

'  Baltimore  and  Ohio  R.  R.  Co.  vs.  Allen,  22  Fed.  Rep.  376. 

*  Commonwealth  vs.  American  Dredging  Co.,  122  Pa.  State,  386. 

^  People  ex  rel.  Pacific  Mail  S.  S.  Co.  vs.  Commissioners,  64  N.  Y.  541. 
As  to  how  the  realty  outside  the  state  should  be  valued,  see  52  Hun,  93; 
People  ex  rel.  Panama  R.  R.  Co.  vs.  Commissioners,  104  N.  Y.  240  (1887). 
For  California,  see  San  Francisco  vs.  Fry,  63  Cal.  470  (1883):  San  Francisco 
vs.  Flood,  64  Cal.  504  (1884). 

•  This  was  formerly  the  case  also  in  New  Jersey,  where  personal  property 


282 


ESSAYS  IN  TAXATION 


i 


becoming  the  custom,  even  in  most  of  the  states  which  levy 
a  corporate  property  tax,  to  exempt  the  intangible  property, 
on  the  principle  that  the  domicile  of  the  foreign  corporation 
fis  not  changed  by  its  doing  business  in  other  states.^ 

Manifestly,  if  the  commonwealths  will  still  cHng  to  the 
policy  of  taxing  the  actual  corporate  property,  the  only  logi- 
cal and  just  method  is  for  each  state  to  exempt  so  much  of  the 
corporate  property  as  is  already  taxable  in  another  state. 
The  federal  government  has  unfortunately  not  exercised  its 
right — if  indeed  it  possesses  any — to  compel  such  uniformity. 
Our  only  hope,  therefore,  lies  in  the  progress  of  correct  public 
sentiment  and  its  influence  on  commonwealth  legislation. 
Until  then,  we  shall  still  be  confronted  by  the  present  confusion. 

2.  Interstate  taxation  of  corporate  securities.  The  evils  arising 
from  the  simultaneous  taxation  by  different  states  of  the  same 
corporate  stock  or  bonds  or  dividends  and  interest  have  been  so 
patent  as  to  lead  to  statutory  changes  and  judicial  interpre- 
tations of  considerable  importance.  In  Pennsylvania,  after 
I*  being  long  the  custom,  it  was  subsequently  judicially  decided 
to  be  the  law,  that  the  tax  on  capital  stock  applies  not  to  the 
whole  capital  but  only  to  such  a  proportion  of  the  capital  stock 
as  is  employed,  either  actually  or  constructively,  within  the 
state.2  The  act  of  1907  appUed  the  same  principle  to  the 
bonus  on  charters.  In  New  York,  the  original  statute  at- 
tempted to  follow  the  old  rule;  but  the  law  was  subsequently 
so  amended  as  to  provide  expressly  for  the  taxation  of  only  so 
much  of  the  capital  stock  as  is  employed  within  the  state. ^  In 
a  case  which  arose  under  the  old  statute,  although  decided 
after  the  passage  of  the  amendment,  the  court  of  appeals  de- 
clared itself  forced  to  adhere  to  the  old  rule,  saying  that,  although 
it  was  extremely  hard  and  unjust,  the  court  was  unable  so  to 
construe  the  statute  as  to  relieve  the  corporation  from  the 
provisions  of  the  law.*    The  principle  in  both  these  common- 

outside  of  the  state,  which  was  exempt  in  the  case  of  individuals,  was  tax- 
able when  owned  by  corporations.  State  vs.  Metz,  3  Vroom,  199;  State  vs. 
Haight,  6  Vroom,  279.  This  was  however  altered  by  subsequent  legislation. 
Cf.  the  N.  J.  Revised  Tax  Act  of  1903,  sec.  3. 

1  Cf.  Insurance  Co.  vs.  Assessors,  44  La.  Ann.  760.    Cf.  ibid.,  765. 

« Commonwealth  vs.  Standard  Oil  Co.,  101  Pa.  State,  119.  As  to  the 
previous  custom,  etc.,  see  Decisions  of  the  Auditor-General,  1878-80,  p.  296. 

»  New  York  Laws  of  1885,  chap.  oOl,  p.  858. 

*  People  vs.  Horn  Silver  Mining  Co.,  105  N.  Y.  76,  especially  88. 


THE  TAXATION  OF  CORPORATIONS 


283 


wealths  now  applies  equally  to  domestic  and  to  foreign  corpora- 
tions. In  Massachusetts,  however,  where  the  franchise  tax, 
as  we  have  seen,  is  appUcable  only  to  domestic  corporations' 
the  general  corporation  tax  is  levied  on  the  total  capital  stock 
irrespective  of  its  employment. 

So  far  as  railroads  are  concerned,  it  has  become  the  common 
practice  to  assess  only  so  much  of  the  capital  stock  as  is  rep- 
resented by  the  proportion  which  the  mileage  in  the  state  bears 
to  the  total  mileage.  This  is  true  even  in  states  like  Massa- 
chusetts, which  do  not  apply  the  principle  to  corporations  in 
general,  as  well  as  in  states  like  Connecticut,  where  stock  and 
bonds  are  taxable.  Such  a  standard,  while  not  perfectly  exact,  is 
fairly  accurate;  and  has  been  upheld  as  entirely  constitutional.*^ 
It  is  applicable  equally  to  telegraph  companies  and  to  other 
transportation  companies;  and  is  gradually  being  applied  to 
them,  although  not  quite  so  commonly  as  in  the  case  of  raih-oads, 
in  all  those  states  which  tax  capital  stock  directly.  The  prin- 
ciple is  sound,  although  it  may  be  contended  with  justice  that 
business  done,  i.e.  receipts,  is  an  even  better  test  than  mileage, 
even  though  mileage  would  have  to  be  one  of  the  factors  em- 
ployed in  apportioning  receipts. 

For  other  corporations,  however,  it  will  readily  be  seen 
how  vague  is  the  New  York  and  Pennsylvania  doctrine  of 
"capital  employed  within  the  state."  What  business  firm  or 
corporation  with  ramifications  all  over  the  country  can  tell 
exactly  or  even  approximately  how  much  of  its  capital  is 
"employed"  within  any  one  state?  Even  if  they  can,  how 
many  of  them  will  tell,  when  concealment  will  enable  them 
to  evade  the  tax?  In  some  of  our  commonwealths  the  state 
officers  have  the  right  to  inspect  the  books  of  corporations 
and  to  change  the  assessments  if  they  deem  them  too  low. 
Even  then,  what  guarantee  is  there  that  they  will  discover 
the  real  proportion?  The  taxation  of  so  much  of  the  capital 
as  is  employed  within  the  state  is  extremely  difficult. 

Because  of  the  fact  that  many  states  still  follow  the  old  New 
York  practice  it  may  be  interesting  to  notice  some  New  York 
decisions  of  cases  which  occurred  before  the  present  amend- 
ments were  adopted.  A  Massachusetts  corporation— a  tele- 
phone company— was  taxed  in  New  York  by  assessing  the  whole 
capital  in  proportion  to  the  number  of  telephones  used  in  the 

1  Delaware  RaUroad  Tax  Case,  18  Wall.  208;  Erie  Railroad  vs.  Pennsyl- 
vania, 21  WaU.  492.  ^ 


284 


ESSAYS  IN  TAXATION 


i 


I 


state.  Although  the  tax  was  declared  invalid  for  quite  another 
reason,  viz.,  that  the  corporation  was  not  technically  ''doing 
business"  in  the  state,  the  court  entered  into  a  discussion, 
oUter  indeed,  of  the  question  with  which  we  are  dealing  here. 
Chief  Justice  Ruger  used  the  following  language: — 

"It  is  by  no  means  clear  that  the  mode  adopted  .  .  .  produces  a 
correct  result.  .  .  .  We  are  quite  unable  to  sanction  a  principle  which 
would  subject  it  [the  corporation]  to  the  liability  of  being  taxed,  not 
only  in  [the  state]  where  it  is  located,  as  it  undoubtedly  would  be  under 
the  law  as  laid  down  by  us  [in  the  Horn  Silver  Mining  Company  Case], 
on  Its  entire  capital  stock  and  gross  earnmgs;  but  also  in  each  state  of 
the  Union  in  which  it  should  own  telephones  on  such  proportion  of  its 
capital  stock  and  gross  earnmgs  as  the  law-makers  of  such  state  saw 
fit  to  impose.* 

It  is  difficult  to  see  the  justice  of  this  conclusion.  It  happens 
that  IVIassachusetts  until  1885,  still  followed  the  incorrect  and 
inequitable  plan  of  taxing  the  whole  capital.  But  that  was  no 
excuse  for  the  New  York  court  to  interpret  the  old  statute 
in  the  same  way,  or  to  assume  that  other  states  will  also  follow 
the  precedent  which  the  court  itself  pronounced  **  extremely 
hard  and  unjust."  Two  wrongs  do  not  make  a  right.  In  the 
absence  of  any  federal  law  regulating  the  subject,  the  only 
upright  course  for  each  commonwealth  to  pursue  is  to  follow 
the  dictates  of  interstate  comity  and  the  sound  principles  of 
the  science  of  finance  by  taxing  only  so  much  of  the  corporate 
capacity  as  is,  economically  speaking,  within  its  jurisdiction. 
As  we  have  repeatedly  said,  the  taxation  of  corporate  stock 
is  by  no  means  the  ideal  method.  But  if  the  New  York  principle 
of  taxing  capital  stock  and  gross  earnings  be  nevertheless 
followed,  it  is  difficult  to  discover  any  more  practicable  or 
more  defensible  method  of  ascertaining  the  due  proportion 
of  capital  stock  employed  or  gross  profits  earned  within  the 
state  than  by  considering  the  number  of,  or  royalties  from, 
the  telephones  used.  This  is  analogous  to  the  Connecticut 
system  of  proportional  mileage  as  applied  to  railroad  companies. 
In  the  case  of  telephone  companies,  however,  the  number  of 
instruments  used  is  a  better  test  than  the  mileage  of  the  tele- 
phone v/ires;  for  the  capital,  as  well  as  the  expenditure,  is  far 
more  nearly  in  direct  proportion  to  the  number  of  telephones 
in  use  than  to  the  amount  of  wire  employed. 
In  the  above  case  the  law  was  declared  invalid  because  the 
1  People  vs.  American  BeU  Telephone  Co.,  117  N.  Y.  242,  especially  256. 


•flW 


THE  TAXATION  OF  CORPORATIONS 


285 


tax  was  assessed  on  a  foreign  corporation.  Even  though  this 
foreign  corporation  held  stock  in  various  domestic  corporations, 
it  was  not  legally  doing  business  in  the  state;  since  before  a 
foreign  corporation  can  be  taxed  under  the  New  York  law 
it  must  not  only  employ  a  portion  of  its  capital  in  that  state, 
but  must  also  be  engaged  in  doing  business  there.^  In  the 
case  of  a  domestic  corporation  the  fact  that  the  capital  is  em- 
ployed within  the  state  is  a  sufficient  ground  for  taxation. 
So  far  as  its  capital  stock  is  invested  in  the  stock  of  foreign 
companies,  it  is  not  taxable  because  it  is  not  employed  within 
the  state;  but  so  far  as  its  capital  is  invested  in  the  bonds  of 
foreign  corporations  taken  in  return  for  the  sale  of  patent 
rights,  it  is  taxable.^  In  another  case  which  also  arose  under  the 
old  law  it  was  held  that  the  proportion  of  sales  within  the  state 
to  the  total  sales  of  a  foreign  corporation  is  not  a  fair  test  of 
the  capital  employed  within  the  state.  Sales  may  be  made  by 
sample,  so  that  the  corporation  may  simply  keep  an  office  in 
the  state  and  employ  none  of  its  capital  there.^ 

In  some  recent  laws,  as  in  Kentucky,  the  proportion  of  the 
capital  stock  which  is  taxed  must  bear  the  same  proportion 
to  the  entire  capital  stock  that  the  corporate  receipts  in  the 
state  bear  to  the  total  corporate  receipts.  This  is  a  simple 
solution  of  the  problem,  but  falls  properly  under  the  heading 
of  double  taxation  of  receipts,  to  be  discussed  below. 

3.  Interstate  taxation  of  non-resident  bondholders  or  stock- 
holders. The  subject  of  the  taxation  of  corporate  stock  or 
bonds  is  complicated  in  another  way  by  the  question  of  extra- 
territoriality. The  problem  is  this:  Can  a  corporation,  even 
though  its  capital  be  employed  wholly  within  the  state,  be 
taxed  on  its  capital  or  bonded  debt  if  these  are  owned  in  part 
by  residents  of  another  state? 

The  federal  Supreme  Court  has  arrived  at  some  very  remark- 
able conclusions.  So  far  as  bonds  are  concerned,  the  above 
practice  has  been  pronounced  unconstitutional.  In  one  case 
it  has  been  held  that  a  state  tax  on  bonds  issued  by  a  railroad 
company  and  secured  by  a  mortgage  on  a  line  lying  partly 

*  People  ex  rel.  American  Construction  and  Dredging  Co.  vs.  Wemnle 
129  N.  Y.  558  (1892). 

2  People  ex  rel.  Edison  Electric  Light  Co.  vs.  Campbell,  139  N.  Y.  543 
(1893). 

» People  ex  rel.  The  Seth  Thomas  Clock  Co.  vs.  Wemple.  133  N.  Y.  323 
(1892). 


286 


ESSAYS  IN  TAXATION 


I, 


in  another  state  was  void,  because  the  state  was  taxing  to  that 
extent  '* property  and  interests  beyond  her  jurisdiction."  ^ 
A  later  case  went  further  and  decided  in  general  terms  that 
a  tax  on  corporate  bonds  is  invalid  as  to  non-resident  owners, 
because  the  debts  are  the  property  not  of  the  debtor,  i.e.  the 
corporation,  but  of  the  creditors,  i.e.  the  bondholders.  They 
are  the  obligations,  not  the  property,  of  the  debtors.  But  the 
creditors  cannot  be  taxed  on  their  property  because  they  are 
not  within  the  jurisdiction  of  the  state.^  The  particular  statute 
in  this  case  was  the  Pennsylvania  law  of  1868,  requiring  cor- 
porations to  retain  five  per  cent  on  the  interest  due  on  the 
bonds,  payable  to  non-residents.  The  state  courts  which  had 
hitherto  entertained  a  different  opinion  were  compelled  to 
acquiesce;  and  in  a  later  case,  decided  in  the  same  common- 
wealth, the  state  tax  on  corporate  loans,  i.e.  on  bonded  indebted- 
ness, was  upheld  only  so  far  as  it  applied  to  the  bonds  owned 
by  the  residents,^  being  declared  to  be  a  tax  on  the  bondholder, 
not  on  the  corporation.'*  This,  therefore,  is  the  accepted  law 
of  the  land  as  to  bonds. 

Shares  of  stock,  on  the  other  hand,  are  treated  quite  differ- 
ently. It  has  indeed  been  decided  that  a  state  tax  on  divi- 
dends is  unconstitutional  as  to  non-residents  if  the  corporation 
be  required  to  withhold  the  tax  from  the  dividends.^  The 
New  Jersey  courts,  moreover,  have  held  that  a  corporation  is 
not  liable  on  that  part  of  its  stock  owned  by  non-residents.® 
The  United  States  courts,  however,  have  uniformly  maintained 
that  a  state  tax  on  capital  stock,  even  though  the  stock  be 
held  partly  by  non-residents,  is  legitimate  on  the  ground  that 
the  tax  is  laid  on  the  corporation  as  a  whole,  and  not  on  the 
individual  shareholder.^  A  later  case  even  decided  that  a 
state  tax  on  the  shares  of  stockholders,  which  the  company  is 
required  to  pay  irrespective  of  dividends,  is  not  a  tax  on  the 
shareholders  but  on  the  corporation.^    This  is  held  to  be  true 

*  Railroad  Company  vs.  Jackson,  7  Wall.  262. 

*  State  Tax  on  Foreign-held  Bonds,  15  Wall.  300. 

»  Commonwealth  vs.  Delaware  Division  Canal  Co.,  123  Pa.  594. 

*  Bell's  Gap  R.  R.  Co.  vs.  Commonwealth,  134  U.  S.  232. 
'  Oliver  ys.  Washington  Mills,  11  Allen,  268. 

*  26  N.  J.  181 ;  3  Zabriskie,  506,  517. 

'  Delaware  Railroad  Tax  Case,  18  Wall.  208. 

"  New  Orleans  vs.  Houston,  119  U.  S.  265.  Cf.  also  196  U.  S.  466,  up- 
holding the  Maryland  tax  on  non-resident  stockholders.  See  Corry  vs. 
Baltimore,  96  Md.  310. 


THE  TAXATION  OF  CORPORATIONS 


287 


notwithstanding  the  fact  that  in  another  case  a  tax  on  dividends 
or  interest  paid  by  the  corporation  was  held  to  be  a  tax  on  the 
income  of  the  stockholder  or  of  the  creditor,  and  not  on  the 
income  of  the  corporation.^ 

The  present  state  of  the  law,  therefore,  is  that  the  entire 
capital  stock  of  a  corporation  may  be  taxed  by  any  common- 
wealth, but  that  only  so  much  of  the  bonds  are  taxable  to  the 
corporation  as  are  owned  by  residents  of  the  state.  The  mere 
statement  of  this  proposition  makes  it  evident  how  impracti- 
cable would  be  the  otherwise  defensible  system  of  taxing  cor- 
porations by  a  separate  tax  on  stock  and  an  additional  tax  on 
bonds.  The  Pennsylvania  system,  which  at  first  blush  seemed 
to  be  an  excellent  solution  of  the  problem,  thus  appears  to  be 
shorn  of  its  chief  merits,  if  the  present  law  of  the  land  is  sound. 
The  great  majority  of  states,  the  bonds  of  whose  corporations 
are  owned  mainly  outside  of  the  state  in  large  financial  centres 
like  New  York  or  Boston,  would  find  such  a  tax  sadly  inad- 
equate. ^    Even  in  the  state  of  New  York,  where  for  several 

1  United  States  vs.  Raiboad  Co.,  17  Wall.  332. 

2  An  investigation  by  the  Pennsylvania  Tax  Conference  disclosed  the 
following  facts  as  to  certain  Pennsylvania  railroads:— 

Total  Bond  Issues      Amount  held  in  Pa     ^p^Raised  Value  of    Percentage 

"*""""  OF  Line  in  Pa. 


$    450,000 

352,000 

72,800 

230,000 

240,000 

320,000 

5,250,000 

890,000 

990,000 

3,400,000 

2,900,000 


116,000 

63,000 

2,700 


8,000 


1,200,000 

80,000 
6,000 


179,000 
2,280,000 
495,000 
500,000 
200,000 
1,800,000 
800,000 
270,000 
300,000 
275,000 


179,000 
2,100,000 
456,000 
410,000 
200,000 
1,800,000 
800,000 
260,000 
300,000 


Stock 
$   450,000 
1,400,000 
383 
384 
48,000 
121,100 
3,388,550 
1,400,000 
1,278,300 
2,000,000 
127,000 
800,000 
3,546,670 
144,375 
2,900,000 
1,850,000 
650,000 
80,000 
600,000 
800,000 
2,370,466 


642,000 


100 

it 
it 
tt 
it 
*t 

U 
U 
tt 
tt 

50 

100 

tt 

tt 
It 
tt 
It 
tt 

M 

a 
u 
u 
tt 

u 


288 


ESSAYS  IN  TAXATION 


years  the  comptroller  clamored  for  a  tax  on  corporate  indebted- 
ness, the  proceeds  would  fall  far  below  the  actual  capacity  of 
the  corporations.  The  decisions  of  the  Supreme  Court  prevent 
double  taxation,  it  is  true,  but  they  do  it  so  effectually  as  also 
to  prevent  just  taxation. 

The  same  difficulty  applies  to  the  taxation  of  bonds  of  for- 
eign corporations  held  in  the  state.  A  recent  case  has  decided 
that  a  state  cannot  impose  upon  a  corporation  chartered  by 
another  state,  when  paying  in  that  other  state  the  interest 
due  upon  bonds  held  by  a  resident  of  the  first  state,  the  duty 
of  deducting  from  the  interest  so  paid  the  amount  assessed  upon 
the  bonds  by  a  tax  law  of  the  first  state.  ^ 

From  the  economic  point  of  view,  these  decisions  are  inde- 
fensible. If  the  tax  on  capital  stock  is  a  tax  on  the  corporation, 
then  the  tax  on  mortgage  bonds  is  cfiually  a  tax  on  the  corpora- 
tion. Stock  and  bonds  together  represent  the  corporate  prop- 
erty, for  the  value  of  the  stock  is  diminished  by  the  existence  of 
the  bonds.  The  bondholders,  viewed  from  the  economic  stand- 
point, are  no  more  creditors  of  the  corporation  than  are  the 
stockholders.  They  are  co-proprietors,  just  as  mortgagor  and 
mortgagee  are  in  economic  fact  co-owners  of  the  land.  It  is, 
therefore,  difficult  to  see  any  justification  for  taxing  non- 
resident stockholders  while  exempting  non-resident  bondholders. 
The  same  rule  should  be  applied  to  both  classes,  for  their  in- 
terests in  the  prosperity  of  the  corporation  are  in  this  respect 
precisely  the  same.  The  original  Pennsylvania  decision  which 
was  reversed  by  the  federal  Supreme  Court  rested  on  an  earlier 
case  involving  much  the  same  question,  known  as  Maltby's 
Case.  And  with  all  due  deference  to  the  Supreme  Court,  it 
must  be  stoutly  maintained  that  to  the  student  of  political 
economy  the  original  Pennsylvania  decision  seems  sounder 
than  that  rendered  by  the  federal  tribunal.  In  Maltby's  Case 
the  court  uses  the  following  language: — 

"  What  would  the  plaintiff's  [a  non-resident]  loan  be  worth  if  it  were 
not  for  the  franchises  conferred  upwn  the  corix)ration  by  the  common- 
wealth [of  Pennsylvania,  francliises  which  are  maintained  and  pro- 
Some  of  the  results  are  very  absurd:  Railroad  no.  4,  although  having 
$230,000  bonds,  paid  a  tux  of  $1.92.  Road  no.  IS,  worth  about  the  same 
amount,  paid  $1,200.  The  last  road  but  one  paid  no  taxes  at  all.  The  road 
half  of  whose  mileage  was  in  the  state  paid  nothing  at  all  on  its  $2,900,000 
bonds. 

*  Raih-oad  Co.  vs.  Pennsylvania,  153  U.  S.  629. 


THE  TAXATION  OF  CORPORATIONS 


289 


tected  by  the  ci\al  and  military  power  of  the  commonwealth.  .  .  . 
It  is  on  this  ground  that  the  legislature  discriminates  between  corpora- 
tion loans  and  private  debts  as  objects  of  taxation.  .  .  .  The  loans 
and  stocks  of  a  railroad  company  resemble  each  other  in  many  respects. 
Both  are  subscribed  under  the  authority  of  a  special  law,  and  both  are 

so/arcrt/?i«aahat  they  are  employed  for  the  same  general  purpose.  .  .  . 
Although  loans  and  stocks  are  distinguishable  for  many  purposes,  yet 
the  legislature  committed  no  very  great  solecism  in  treating  loans  as 
taxable  property  within  our  jurisdiction.  .  .  .  Corporation  loans, 
though  in  one  sense  mere  debts,  are,  like  moneys  at  interest,  taxable 
as  property."  i 

This  is  perfectly  sound  economics,  although  it  is  not  now  the 
law  of  the  United  States. 

It  is  remarkable  that,  in  several  ca^es  decided  since  the  leading 
case  of  the  state  tax  on  foreign-held  bonds,  the  Supreme  Court 
has  applied  to  the  relations  between  the  federal  government 
and  foreign  states  a  principle  entirely  different  from  that  which 
it  invoked  in  the  case  of  the  commonwealths.  It  has  been  held 
that  the  national  tax  imposed  during  the  Civil  War  on  the 
dividends,  coupons  and  profits  of  transportation  companies 
IS  an  excise  tax  on  the  business,  and  that  it  is  valid  even  though 
the  dividends  or  interest  are  withheld  from  a  foreign  stock- 
holder or  bondholder.2  Justice  Field  in  a  dissenting  opinion 
showed  the  incongruity  between  these  decisions  and  the  earlier 
ones  as  applied  to  commonwealth  laws.    He  said : — 

"  If  the  United  States  can  do  this,  why  may  not  the  state  do  the  same 
thing  with  reference  to  the  bonds  issued  by  corporations  created  under 
their  laws?  What  is  sound  law  for  one  sovereignty  ought  to  be  sound 
law  for  another." ' 

This  protest,  however,  was  in  vain,  and  the  legal  status  of 
the  problem  continues  to  be  anomalous.  The  federal  govern- 
naent  can  impose  a  tax  on  the  total  stock  and  bonds,  or  total 
dividends  and  interest  of  corporations,  irrespective  of  the 
residence  of  the  holders.  The  separate  commonwealths,  on  I 
the  other  hand,  which  are  treated  like  foreign  countries  in  the 
case  of  corporate  stock  or  dividends,  can  impose  a  tax  on  only 
so  much  of  the  bonds  or  interest  as  are  owned  by,  or  due  to, 
residents.    This  is  of  course  illogical. 

»  Maltby  vs.  Reading  and  Columbia  Railroad  Co.,  53  Pa.  State,  140. 
2  Railroad  Company  vs.  Collector,  100  U.  S.  595  (1879);  United  States  vs. 
Ene  Railroad  Co.,  106  U.  S.  327  (1882). 
'  106  U.  S.  335, 


i 


290 


ESSAYS  IN  TAXATION 


I 


A  peculiarly  interesting  complication  arises  in  those  com- 
monwealths where  the  law  of  mortgage  has  been  changed  for 
tax  purposes.  One  of  the  chief  grounds  of  the  decision  in  the 
Foreign-held  Bond  Case  was  that  the  railroad  lands  on  which 
the  bonds  and  mortgages  were  issued  lay  in  Pennsylvania, 
and  that  the  non-resident  bondholder  had  no  property  therein. 
Said  Justice  Field: — 

"  The  property  in  no  sense  belonged  to  the  non-resident  bondholder 
or  to  the  mortgagee  of  the  company.  The  mortgage  transferred  no 
title;  it  created  only  a  lien  upon  the  property.  Though  in  form  a  con- 
veyance, it  was  both  in  law  and  equity  a  mere  security  for  the  debt. 
The  mortgagee  has  no  estate  in  the  land." 

It  would  be  interesting,  if  this  were  the  proper  place,  to 
trace  the  law  of  mortgage  through  both  the  Roman  and  the 
English  law,  and  to  show  that  in  each  system  the  mortgagee 
originally  had  both  possession  and  property;  that  in  a  later 
stage  he  had  no  property  in  the  land  but  retained  the  posses- 
sion; until  finally  he  had  neither  property  nor  possession,  but 
simply  a  lien.^  Be  that  as  it  may,  it  is  true  that  Justice  Field 
correctly  represented  the  American  law  on  the  subject.  That 
the  mortgagee  has  no  estate  in  the  land  is  the  Pennsylvania 
law;  ^  and  similar  cases  have  been  decided  in  the  same  way  in 
other  commonwealths.  Thus,  in  an  Iowa  case,  a  corporation 
mortgage  held  by  a  non-resident  was  declared  non-taxable  in 
Iowa  because  "the  mortgagee  has  only  a  chattel  interest.  .  .  . 
The  mortgage  is  personal  property  .  .  .  and  attaches  to  the 
person  of  the  owner."  ^  So  also  under  the  old  constitution  of 
California,  a  case  of  intermunicipal  taxation  was  decided  in 
the  same  way.  A  judgment  of  record  in  one  county  upon  the 
foreclosure  of  a  mortgage  situated  in  that  county,  the  owner 
of  the  judgment  being  the  resident  of  another  county,  was  held 
not  taxable  in  the  first  county  because  "the  thing  secured  by 
the  mortgage  is  intangible  and  has  no  situs  distinct  and  apart 
from  the  residence  of  the  holder.  It  pertains  to  and  follows 
the  person."  * 

*  For  the  Roman  law  of  fiducia,  pignus  and  hypotheca,  see  Hunter,  Roman 
Law,  pp.  262-276.  For  the  development  of  the  English  law,  see  Digby,  An 
Introduction  to  the  History  of  the  Law  of  Real  Property ^  chap,  v.,  §  5  (2). 

2  Rickert  vs.  Madeira,  45  Pa.  State,  463. 

'  Davenport  vs.  The  Mississippi  and  Missouri  Railroad  Co.,  12  Iowa,  539. 

*  People  vs.  Eastman,  25  Cal.  603.  See  also  State  of  Nevada  vs.  Earl,  1 
Nevada  State,  397;  State  vs.  Ross,  3  Zabriskie,  517. 


THE  TAXATION  OF  CORPORATIONS  291 

It  will  be  seen  that  all  these  cases  turn  upon  the  point  that 
the  naortgage  is  personal  property;  but  in  several  common- 
wealths, as  we  know,i  it  has  been  provided  that  the  interest 
of  the  mortgagee  should  be  considered,  for  purposes  of  taxation 
only,  as  realty.     This  changes  the  whole  situation  and  entirelv 
underimnes  the  foundation  of  the  decision  in  the  Foreign-held 
iiond  Case.     If  the  interest  of  the  non-resident  bondholder 
i.e.,  the  mortgagee,  is  no  longer  personalty,  it  does  not  follow 
the  person  of  the  bondholder,  but  may  be  taxed  by  the  common- 
wealth  m  which  the  corporation  is  situated.    The  taxation  of 
non-resident  bondholders  must  thus  be  assimilated  in  these 
states  to  that  of  non-resident  stockholders,  and  the  federal 
decision  will  therefore  be  appHcable  to  one  part,  but  inappHcable 
to  another  part,  of  the  United  States.     It  may  even  happen 
that  the  corporate  property  covered  by  the  mortgage  is  situated 
m  several  different  states,  so  that  part  of  the  bonds  may  be 
subject  to  one  law,  part  to  another.    The  ensuing  complications 
may  be  easily  imagined.    It  would  be  far  better  for  the  Supreme 
Court  to  abandon  the  whole  contention  and  on  purely  economic 
grounds  to  reverse  its  decision.    In  assessing  a  tax  on  capital 
stock  or  bonded  debt,  it  should  be  entirely  immaterial  whether 
or  not  some  of  the  stockholders  or  bondholders  Hve  without 
the  state.     The  residence  of  the  security  holder  should  have 
nothing  to  do  with  the  taxation  of  the  corporation. 

If  the  tax  is  imposed  not  on  the  corporation  but  on  the  share- 
holders,   non-resident    stockholders   would   naturally    escape 
because  outside  the  tax  jurisdiction.    In  some  cases,  however,' 
It  IS  provided  that,  corporations  must  then  pay  taxes  for  the 
non-resident  stockholders. ^ 

From  one  point  of  view  there  is  indeed  some  force  in  the 
contention  that  the  residence  of  the  security  holder  should 
be  considered.  It  may  often  occur  that  the  stock  and  bonds 
ot  a  corporation  lying  within  one  state  may  be  owned  by  res- 
idents of  another  state.  If  the  whole  fortune  of  these  individuals 
IS  invested  m  such  securities,  the  second  state  would  get  no 
revenue  at  all  if  it  exempted  securities  of  taxed  corporations. 
Yet  the  individuals  certainly  owe  some  duty  to  the  state  of 
their  residence;  their  economic  allegiance,  so  to  speak,  is  partly 
due  to  the  state  where  they  hve.    On  the  other  hand,  it  is  equally 

*  Supra,  p.  104. 

JJ!it'n^'''n''^%'  part  viii.,  art.  xi.,  § 87;  N.  J.  Rev.,  1877,  p.  1199  (as  t« 
banks);Ore.Gen.Laws,  1872,chap.57,art.l,  §6. 


292 


ESSAYS  IN   TAXATION 


\\  '! 


I 


clear  that  the  corporatipn  owes  a  decided  duty  to  the  state 
where  it  is  situated  and  wlijere  its  earnings  are  secured.  How  is 
this  conflict  to  be  avoided? 

The  most  desirable  solution  of  the  difficulty,  as  we  have 
already  intimated,  would  seem  to  be  the  division  of  the  tax 
between  the  state  of  the  corporation  and  that  of  the  security 
holder.  Each  party  possesses  taxable  faculty  or  ability  within 
the  borders  of  the  respective  states — the  corporation  where 
it  earns  its  money,  the  security  holder  where  he  resides  and 
enjoys  the  benefit  of  government.  For  each  state  to  levy  the 
entire  tax  would  be  double  taxation;  hence,  if  one  party  is 
taxed,  the  other  should  be  exempt.  In  order  to  obviate  the 
complete  loss  of  revenue  to  the  one  state,  and  to  satisfy  the 
conflicting  claims,  the  principle  of  economic  allegiance  must  be 
invoked,  and  each  state  must  be  permitted  to  tax  that  portion 
of  the  economic  faculty  that  properly  falls  within  this  category. 
This  of  course  must  be  arranged  by  interstate  agreement.  The 
plan  has  not  yet  been  tried  in  any  American  state,  because  no 
serious  attempt  has  yet  been  made  to  grapple  with  the  dif- 
ficulties; yet  no  final  escape  from  the  complexities  of  double 
taxation  can  be  attained  until  some  such  method  is  adopted. 
Buf  even  though  the  proceeds  ought  to  be  so  divided,  the  tax 
ought  to  be  levied  as  a  whole,  entirely  irrespective  of  the  res- 
idence of  the  security  holder.  This  part  of  the  problem  may  be 
solved  according  to  the  system  proposed  by  the  Tax  Conference 
of  Pennsylvania  and  practised  in  some  other  states,  hke  Illinois, 
Indiana  and  Connecticut;  namely,  by  assessing  the  corporation 
on  a  valuation  equal  to  the  market  value  of  the  whole  capital 
stock  plus  the  entire  bonded  debt,  with  a  provision  that  only 
so  much  of  the  capital  shall  be  assessed  as  Is  economically  within 
the  state. 


4.  Interstate  taxation  of  receipts  or  income.  This  phase  of 
interstate  double  taxation  presents  far  less  difficulty.  In  re- 
gard to  gross  receipts  the  measure  of  faculty  is  very  simple, 
viz.,  the  gross  receipts  from  business  done  within  the  state. 
In  the  case  of  insurance  companies  this  is  fast  becoming  the 
general  rule  in  this  country.  When  the  returns  do  not  show 
the  precise  amount  of  the  gross  receipts,  the  laws  often  provide, 
especially  in  the  case  of  transportation  companies,  that  the 
** gross  earnings  within  the  state"  should  be  deemed  to  be  that 
proportion  of  the  entire  gross  earnings  which  the  mileage  within 


THE  TAXATION  OF  CORPORATIONS 


293 


the  state  bears  to  the  total  mileage.  This  is  the  definition  in 
Mame  and  many  other  states,  and  it  has  generally  been  upheld. ^ 
Under  this  definition  the  question  has  sometimes  arisen  whether 
the  word  mileage  is  to  be  interpreted  to  mean  miles  of  track 
or  miles  of  line.  The  former  is,  obviously,  the  correct  economic 
basis,  for  the  more  double  tracks,  sidings  and  spurs,  the  denser 
usually  is  the  traffic.  In  Wisconsin  mileage  has  been  held  to 
include  side  tracks.^  The  mileage  principle  has  also  been  ap- 
plied to  street  railway  companies,  in  the  assessment  of  lines 
withm  and  without  the  city  limits.^  An  interesting  variation 
IS  found  in  the  Virginia  law  imposing  the  gross  receipts  tax  on 
railroads  which  adds  a  proviso  making  an  allowance  ''for  a 
reasonable  sum  because  of  any  excess  of  value  of  the  terminal 
facilities  or  other  similar  advantages  situated  in  other  states  over 
similar  facihties  or  advantages  situated  in  this  state." 

Another   definition   of    "gross   earnings   within   the   state" 
which  obviates  this  whole  question  of  double  tracks,  allowances, 
etc.,  has  been  adopted  by  Minnesota  and  more  recently  by 
California.    Thus  to  quote  the  Caiifornia  law  ''gross  receipts 
withm  the  state  shall  be  deemed  to  be  all  receipts  on  business 
beginning  and  ending  within  this  state,  and  the  proportion  , 
based  upon  the  proportion  of  the  mileage  within  this  state  to  the  / 
entire  mileage  over  which  such  business  is  done,  of  receipts 
on  all  business  passing  through,  into  or  out  of  the  state."    Mile- 
age in  this  case  means  simply  the  distance  a  given  shipment 
is  hauled.    If  we  compare  the  so-called  Maine  system  with  the 
so-called  Minnesota  system  it  may  be  said  that  while  the 
foriner  is  really  the  simpler,  the  latter  is  on  the  whole  more 
equitable  in  that  it  does  not  attempt  to  get  any  taxes  or  traffic 
beyond  its  own  limits.^    As  to  other  than  transportation  cor- 
porations the  gross  earnings  tax  can  be  easily  arranged  so  as 
to  obviate  double  taxation. 

If  in  lieu  of  the  gross  earnings  tax  a  tax  on  net  receipts  or 
income  be  imposed,  how  does  the  matter  stand  then?  Strictly 
speaking,  only  so  much  of  the  income  as  is  earned  within  the 
state  should  be  assessed;  but  since  it  is  exceedingly  difficult 
to  apportion  the  expenses  of  a  large  corporation  among  all  its 

U8  Wall.  208,  231.  Cf.  92  U.  S.  608;  125  U.  S.  530;  45  Md.  384;  141 
U.  S.  18;  55  Fed.  Rep.  206. 

2  64  Wis.  130. 

'  74  Md.  405. 

*  Cf.  for  a  discussion  of  the  two  methods  Report  of  the  California  Commis- 
sion on  Revenue  and  Taxation,  1906,  pp.  171-174. 


294 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


295 


branches  m  different  commonwealths,  it  would  seem  preferable 
to  adopt  some  approximate  standard  by  which  the  net  receipts 
could  be  measured.  All  sorts  of  criteria  have  been  attempted  in 
the  vanous  states  imposing  an  income  tax,  some  of  them  of  a 
very  mtricate  nature. »  There  is  ample  room  for  the  elaboration 
ot  a  practicable  and  easily  ascertained  measure. 

We  have  thus  far  considered  only  the  question  of  complica- 
tions  arismg  from  international  or  interstate  taxation      Of 
mmor  consequence,  but  still  of  sufficient  importance  to  deserve 
mention,  are  the  problems  of  intermunicipal  double  taxation 
Ihese  are  of  minor  consequence  because,  in  the  United  States 
at  least,  there  are,  with  the  exception  of  street  car  Unes   few 
instances  of  local  taxes  on  the  receipts  of  corporations  which 
do  any  busmess  without  the  limits  of  the  local  divisions.    On 
the  other  hand,  we  find  local  taxes  on  the  total  property  and 
on  the  capital  stock  of  corporations  which  have  more  than  a 
purely  local  significance.    The  rules  should  be  the  same  as  those 
applied  above  to  cases  of  interstate  taxation.    But  so  long  as 
veiy  few  of  the  commonwealths  accept  these  principles,  it 
will  scarcely  surprise  us  to  find  that  the  local  divisions  almost 
completely  ignore  them.    Thus  in  New  York  City,  the  home 
of  many  huge  corporations  of  national  importance,  it  is  the 
common  practice  to  assess  for  local  purposes  the  entire  capital 
stock  of  a  domestic  corporation,  irrespective  of  the  question 
whether  a  portion  of  its  stock  may  not  be  employed  or  owned 
outside  of  the  confines  of  the  city.    This  is  manifestly  a  crude 
pracnce. 

What  can  Europe  teach  us?  The  chief  countries  in  which 
such  interstate  complications  have  arisen  were  the  federal  states 
of  Germany,  Austria-Hungary  and  Switzerland,  In  two  of  these 
an  attempt  has  been  made  to  regulate  the  matter. 

J  The  New  York  law  prescribes  three  criteria  (1)  The  average  monthlv 
value  of  the  realty  and  tangible  personalty  within  theltltf  TTrh^ 
average  monthly  value  of  bills  and  accounts  receivablenSUhe  ~! 
tion  of  the  average  value  of  the  stocks  of  other  corporations  ow^ed^Th; 
Massachusetts  law  prescribes  the  proportion  of  Tangible  prt^rtv  ex! 
penses  for  wages,  salaries  and  commissions;  gross  recJpts^  inS  di^I 
dends,  and  gains  from  the  sale  of  capital  assets.  In  W^sSn  the 
numerator  of  the  fraction  is  obtained  by  adding  to  the  book  v^npnf«n 
property  owned  within  the  state  (less  certain  items)  the  ^^  lal^  in  the 
state;  then  subtracting  the  factory  cost  of  goods  sold  in  the^Te  an^add  n^ 
actory  and  all  products  manufactured  in  the  state.  The  dLmfnator  i! 
found  by  applymg  the  same  process  to  property  and  business  evei^h^ 


In  Switzerland  the  constitution  of  1874  imposes  on  the 
federal  legislature  the  obligation  of  preventing  double  taxation, 
without  attempting,  however,  to  analyze  or  to  point  out  the 
various  forms  of  double  taxation.^  While  several  decisions 
of  the  Swiss  courts  have  definitely  settled  some  of  the  simpler 
problems  of  duplicate  taxation,  the  more  subtle  questions 
that  interest  us  under  this  fourth  heading  have  not  yet  been 
adjudicated  to  any  extent.  Beyond  the  principle  that  corpora- 
tions, like  natural  persons,  are  taxable  on  their  income  and  on 
their  property  by  the  canton  where  their  chief  office  or  establish- 
ment is  situated,  or  where  their  business  is  conducted,  no 
successful  attempt  has  as  yet  been  made  by  the  federal  legis- 
lature or  courts  to  solve  the  problems  here  discussed.^  A  few 
of  the  cantons,  however,  have  recently  embodied  in  statutes 
the  principle  that  only  so  much  of  the  capital  or  income  as  is 
employed  or  received  within  the  commonwealth  should  be 
taxable.  Such,  for  instance,  is  now  the  law  in  Vaud,  Ticino 
and  Baselstadt.^  In  Bern  the  same  principle  is  applied  to 
intermunicipal  taxation.^     In  Uri  the  taxable  property  and 

1  Art.  46:  "Die  Bundesgesetzgebung  wird  .  .  .  gcgen  Doppelbestcuerung 
die  erforderlichen  Bestimmungen  treffcn."  A  translation  of  the  Swiss  consti- 
tution has  been  published  as  no.  18  of  the  Old  South  Leaflets,  Boston,  1890. 

^Ziircher,  Krilische  Darstellung  der  hundesrechtlichen  Praxis  hetreffend 
das  Verhot  der  Doppelbesteuerung  (Basel,  1882),  pp.  88-93;  Schreiber  [same 
title],  p.  259.  Cf.  also,  in  general,  Speiscr,  Das  Verbot  der  Doppelbesteue- 
rung (Basel,  1886) ;  and  the  chapters  on  double  taxation  in  W.  Gerloff,  Die 
Kantonale  Besteuerung  der  Aktiengesellschaflcn  in  der  Schweiz,  Bern,  1906. 

'  In  Vaud,  all  individuals  as  well  as  private  corporations  or  societies, 
"sont  soumis  a  rimp6t  pour  tout  le  capital  mobilier  affects  au  service  de 
leur  activity  dans  le  canton."  Loi  d'imp6t  sur  la  fortune  mobiliere  et  sur  la 
fortune  immobilidre,  du  21  a6ut,  1886,  chap,  iii.,  art.  12.  Printed  in  Schanz, 
Die  Steuern  der  Schweiz,  v.,  p.  387;  cf.  also,  iv.,  p.  128. — In  Ticino,  "le 
persone,  le  ditte  commerciali,  le  societd  o  gli  enti  morali  in  genere,  che,  non 
avendo  il  loro  domicilio  o  la  loro  sede  nel  Cantone,  vi  tegono  stabilimento, 
succursale,  agenzia,  rappresentanza,  o  vi  escrcitano  un'  industria,  oppure  vi 
poseggono  beni  o  rondite  .  .  .  sono  tenuti  al  pagamento  doll'  imposta,  in 
ragione  della  sostanza  e  della  rendita  che  hanno  nel  Cantone."  I^egge  sull' 
imposta  cantonale  (April  28,  1890),  art.  14.  In  Schanz,  v.,  p.  462. — In 
Baselstadt,  "bei  Gesellschaften  welche  neben  der  Niederlassung  im  Kanton 
auch  eine  solche  aus.serhalb  des  Kantons  besitzen,  tritt  eine  dem  Umfange 
der  ausswartigen  Niederlassung  entsprechende  Minderung  des  Steuerbe- 
trags  ein."  Gesetz  bctreffend  die  Besteuerung  der  anonymen  Erwerbs- 
gesellschaften,  vom  14  Oktober,  1889,  §  4.    In  Schanz,  v.,  p.  50. 

*"Bei  Unternehmungen,  die  in  verschiedenen  Gemeinden  ihr  Gewerbe 
ausiiben,  ist  die  Steuer  nach  Verhaltniss  der  Ausdehnung  des  Geschiifts  an 
diese  Gemeinden  zu  entrichten."  Gesetz  iiber  das  Steuerwesen  in  den 
Gemeinden,  vom  2  Sept.,  1867,  §  7.    In  Schanz,  v.,  p.  88. 


!iii. 


296 


ESSAYS  IN  TAXATION 


'I 


I 


profits  are  calculated  in  proportion  to  relative  mileage.^  In 
Neuchatel  foreign  corporations  are  taxable  only  for  the  profits 
earned  within  the  commonweal th.^  In  Appenzell  it  is  provided 
that  corporations  should  pay  the  income  tax  in  the  place  where 
the  busmess  is  carried  on,  but  in  such  a  manner  as  to  avoid 
double  taxation.^  The  law  of  Ticino  is  especially  interesting 
for  the  further  reason  that  it  also  imposes  a  tax  on  all  corporate 
loans,  but  allows  the  corporation  to  deduct  the  tax  only  from 
the  mterest  on  the  bonds  owned  within  the  canton.^*  Foreign- 
held  bonds  thus  escape  taxation  in  the  hands  of  the  individual 
holder  except  by  the  state  of  the  owner's  residence. 

In  Germany,  the  conditions  are  much  the  same.  In  1870, 
an  imperial  law  was  enacted  which  forbade  in  express  terms 
double  taxation  arising  from  interstate  complications.  This 
law  provided  that  individuals  should  be  taxed  by  the  state  of 
their  domicile,  and  that  real  estate  should  be  taxable  by  the 
state  of  its  location.  The  only  clause  affecting  corporations 
prescribed  that  the  occupation  as  well  as  the  income  from  the 
busmess  could  be  taxed  only  by  the  state  where  the  business 
was  carried  on.^  The  commission  which  drafted  the  law 
however,  evaded  the  main  question  by  asserting  that  the 
exact  proportion  of  the  corporate  business  or  income  taxed 
by  any  one  state  must  depend  on  ^'the  particular  form  of  the 
actual  conditions." «  This  has  settled  nothing,  and  the  matter 
remains,  as  before,  a  subject  for  the  separate  states  to  regulate. 

1  ™,  Steuergesetz  vom  10  Mai,  1886,  art.  13.     In  Schanz,  v.,  p.  376 
Les  societ6s  anonymes  .  .  .  sont  soumiscs  au  memc  imp6t  pour  Ics 
ressources  que  leur  procurent  Ics  affaires  faites  dans  le  pavs."     Loi  sur 
1  imp6t  direct  du  18  octobrc,  1878,  art.  6,  §  3.    In  Schanz,  v.,  p.  219. 

Immerhm  unter  Vermcidung  von  Doppelbcstcuerung."    Vollziehungs- 
verordnung  uber  die  Ausfuhrung  von  Art.  16  dcr  Verfassung  betreffend  das 
hteuerwesen  (April  5,  1880),  art.  6.    In  Schanz,  v.,  p.  26. 
^    "  The  corporations  "sono  tenuti  al  pagamento  dell'  imposta  sull' 

importo  complessivo  delle  obbligazioni  al  portatore  da  loro  emesse  ""  But 
the  law  contains  this  further  provision:  "Non  saranno  colpiti  dall'  imposta 
1  capitah  [including  the  bonds]  di  cui  \  .  .  ove  il  contribuente  dimostri  che 
ci6  costituireJDbe  una  doppia  imposta."  .  .  .  Arts.  15  and  3,  §  3  of  the  law  of 
1890.    In  Schanz,  v.,  pp.  460,  462;  cf.  iv.,  p.  282. 

JyaJo^^^^""  wegen  Beseitigung  der  Doppelbcstcuerung;  vom  13  Mai, 
1870,  j  3.  Reprinted  m  Meitzen,  Die  Vorschriften  fiber  die  Klassen-  und 
klassifinerte  Einkommenstener  in  Preussen,  no.  6. 

.  *"^fs^die  Entseheidung  immer  von  der  besonderen  Gestaltung  der 
tatsachhchen  Verhaltnisse  abhangen  werde."  Cf.  Clauss  "Das  Reichs- 
gesetz  wegen  Beseitigung  der  Doppelbesteuerung,"  in  Schanz's  Finanz- 
Archiv,  v.,  pp.  138-197,  especially  p.  179. 


THE  TAXATION  OF  CORPORATIONS 


297 


Several  of  the  German  commonwealths  have  now  adjusted 
the  difficulties  in  very  much  the  same  way  that  has  been  adopted 
or  proposed  in  various  American  states.  Thus  the  Baden  law 
provided  that  only  so  much  of  the  corporate  income  shall  be 
assessed  as  is  proportional  to  the  amount  of  capital  employed 
within  the  state.  ^  So  the  earlier  Prussian  law  provided  that 
the  taxable  net  income  of  railroads  which  lie  partly  in  other 
states  should  be  estimated  by  the  proportion  of  gross  receipts 
within  the  state,  and  that  this  again  should  be  calculated 
according  to  mileage.^  The  Prussian  local  law  tax  of  1885 
measures  the  proportion  of  corporate  income  or  net  profits 
due  to  each  tax  district  by  the  share  of  gross  receipts  in  the 
case  of  banks  and  insurance  companies,  and  by  the  share  of 
expenses  for  salaries  and  wages  in  the  case  of  transportation 
companies.^  The  income-tax  law  of  1891  states  that  only 
that  part  of  the  net  receipts  actually  earned  in  Prussia  shall 
be  taxable.^ 

The  tendency  therefore  seems  to  be  the  same  in  all  countries. 
Whether  the  tax  be  imposed  on  property  or  on  income,  the 
law  should  be  applicable  to  both  domestic  and  foreign  corpora- 
tions; and  while  no  deduction  should  be  made  for  non-resident 
holders  of  stock  or  bonds,  only  so  much  of  the  property  or 
income  should  be  assessed  as  is  employed  or  received  within 
the  state.  Since  an  exact  standard  is  unattainable,  it  is  advisable 
to  use  the  approximate  test  of  relative  mileage  in  the  case  of 
transportation  companies  and  of  relative  gross  receipts  in  the 
case  of  other  corporations. 

V.  Taxation  of  the  Corporation  and  of  the  Security  Holder 

We  come  finally  to  the  fifth  and  most  important  division 
in  the  subject  of  duplicate  taxation— the  taxation  of  the  cor- 
poration and  of  the  shareholder  or  bondholder.  The  question 
is:  If  we  tax  the  corporation,  shall  we  also  tax  the  individual 
who  owns  the  stock  or  bonds  of  the  corporation?  Is  this  double 
taxation?    Is  it  unjust? 

»  Badisches  Einkommensteuergesetz  von  20  Juni,  1884,  art.  5,  lit.  B.  In 
Finanz- Archiv,  iii.,  p.  368. 

2  Law  of  March  16,  1867,  §  9.  For  the  judicial  decisions  and  rescripts  on 
this  point,  see  Clauss,  op.  cit.,  p.  181. 

'  Conimunalsteuemothgesetz  von  27  Juli,  1885,  §  7.  Printed  in  Finanz- 
Archiv,  iii.,  pp.  174-193,  together  with  an  explanatory  article  by  Secretary 
Herrfurth. 

*  Einkommensteuergesetz  von  24  Juni,  1891,  §  16. 


298 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


299 


% 


Let  us  firet  discuss  the  actual  practice  both  here  and  abroad. 
In  the  Umted  States  the  legal  conditions  are  absolutely  lack- 
ing m  uniformity.    In  some  states  the  tax  on  the  corporation 
IS  declared  to  be  a  tax  on  the  shares,  which  are  accordingly 
exempted  from  assessment.     Thus  in  California,  the  statute 
declares  that  "shares  of  stock  possess  no  intrinsic  value  over 
and  above  the  actual  value  of  the  property  of  the  corporation 
for  which  they  staad,"  and  that  to  tax  both  corporation  and 
shareho  der  is  double  taxation.'     In  Arizona,  we  find  exactly 
similar  language  used.^    In  most  of  the  other  commonwealths 
also,  shares  of  stock  in  the  hands  of  individuals  are  exempt 
when  the  corporation  itself  is  taxed,  although  the  reason  of  the 
rule  IS  not  always  expressly  stated  as  in  the  cases  just  cited. 

On  the  other  hand,  the  statutes  in  North  Carolina,  Wyoming 
and  Iowa   (except  for  manufacturing  corporations)   and  the 
judicial  decisions  in  Illinois,  Iowa,  Louisiana,  Maine  and  Mary- 
land are  to  the  contrary  effect.'    This  was  formerly  true  also  in 
Indiana    Pennsylvania   and   Tennessee.^     In   some   of  these 
cases  It  has  been  held  that  "the  tangible  property  of  a  corpora- 
tion and  the  shares  of  stock  are  separate  and  distinct  kinds 
of  property   under  different  ownership;  the   first   being  the 
property  of  the  corporation  and  the  last  the  property  of  the 
individual  stockholder."     Taxation  of  both  corporation  and 
shares  of  stock  is  hence  pronounced  neither  duplicate  nor  un- 
just taxation,  even  though  the  shares  of  stock  have  no  value 
save  that  which  they  derive  from  the  corporate  property  and 
franchise.^    In  other  cases  again,  it  has  been  held  that  even 
though  the  taxes  amount  to  double  taxation,  they  are  not  un- 
constitutional.    This,  however,  is  true  only  in  those  states 

» Ariz.  Code,  §  2633. 
TTl'  ^7l^%  'l^^i^^oad  Co.,  76  111.  561;  Danville  Banking  Co.  ...  Parks  88 
Ann   ?;  ^   u'  ,^^V\"f^°.^'  59  ^^'  251;  New  Orleans  ...  Canal  Co   32  La 
Ann^  51 ;  Cumber  and  Marine  Railroad  vs.  Portland,  37  Me.  ^4     WUkens 
r«   Baltimore,  103  Md.  293,  and  Baltimore  ...  Allekhany  Co    99  Md    l 

*  15  Ind.  150;  49  Pa.  State,  526;  66  Pa.  State,  77;  47  Pa  State'lS     But  it 
has  been  recently  held  in  Pennsylvania  that  double  taxation  will  not  bf  surL 

^  So  also  in  Switzerland  this  simultaneous  taxation  has  been  upheld  on 
the  stnetly  jurust.c  ground  that  the  corporation  and  the  sharSder  are  d^s^ 

La  Regie  de  Droit  (Lausanne,  1889),  141  and  passim,  ^-ogum, 


which  admit  double  taxation,  as  Pennsylvania  formerly  did, 
even  though  it  be  confessedly  unequal. 

Other  commonwealths,  again,  take  a  less  logical  middle 
ground.  In  the  case  of  certain  corporations  they  do  not  permit 
taxation  of  both  shares  and  corporation;  in  the  case  of  other 
corporations  they  do  not  object  to  this  simultaneous  taxation. 
In  the  case  of  national  banks,  as  we  know,  the  taxation  of  the 
corporation  itself  is  made  impossible  by  federal  law.  Most 
of  the  states,  therefore,  tax  only  the  individual  shares,  although 
they  collect  the  tax  through  the  corporation.  ^  In  many  cases 
this  system  has  been  extended  to  other  banks  besides  national 
banks.  A  few  commonwealths  (Delaware,  Georgia,  .Kansas 
and  North  Carolina)  pursue  this  method  with  regard  to  all 
corporate  shares  in  general,  and  collect  the  tax  from  the  cor- 
poration. ^  In  a  few  others,  including  Iowa,  Kentucky  and 
Vermont,  the  prohibition  of  simultaneous  taxation  of  both 
shareholder  and  corporation  applies  only  to  definite  classes 
of  corporations.^  In  Ohio  it  is  true  only  of  domestic  corpora- 
tions. In  Massachusetts  domestic  corporations  are  taxed  and 
the  individual  shareholders  are  exempt  as  regards  all  dues 
except  those  for  school-district  and  parish  purposes.^ 

The  decisions  of  the  United  States  Supreme  Court  are  some- 
what conflicting.  The  earlier  cases  seem  to  uphold  simultaneous 
taxation  of  corporation  and  of  shareholder.  In  a  late  case, 
however,  the  court  asserts  that  double  taxation  is  never  to  be 
presumed;  and  that,  although  the  commonwealths  have  an 
undoubted  right  to  levy  such  taxes,  in  the  absence  of  a  special 
statutory  provision  the  presumption  is  against  such  an  im- 
position.^ On  this  point,  accordingly,  we  find  contradiction 
of  theory. 

In  a  cognate  matter  there  is  a  still  greater  diversity  of  practice. 

*  See  supra,  p.  155. 

2  Del.  Laws,  13,  chap.  393;  Ga  Code,  sec.  815;  Kan.  Comp.  Laws,  chap. 
107,  sec.  6;  N.  C.  Machinery  Act  of  March  11,  1889,  sec.  A  6. 

'  In  Iowa  the  prohibition  applies  only  to  manufacturing  companies.  Acts 
18th  Gen.  Assembly,  chap.  57,  §§  1,  2;  in  Kentucky  to  turnpike,  gas,  tele- 
graph, telephone,  express,  street-railway  and  toll-bridge  companies,  Rev- 
enue Law  of  1886,  chap.  1223,  art.  iv.,  §  8;  in  Vermont  to  railroads.  Rev. 
Laws,  sec.  270. 

*  Mass.  Pub.  Stat.,  chap,  xi.,  sec.  4. 

^  Tennessee  vs.  Whitworth,  117  U.  S.  136,  137;  also.  New  Orleans  rs. 
Houston,  119  U.  S.  265.  For  the  earlier  cases,  see  Van  Allen  vs.  Assessors, 
3  Wall.  573;  The  Delaware  Railroad  Tax  Case,  18  Wall.  230;  Farrington 
vs.  Tennessee,  95  U.  S.  686;  Sturges  vs.  Carter,  114  U.  S.  511. 


liil 


300 


ESSAYS  IN  TAXATION 


II 


ill 


II 


Some  commonwealths,  as  we  have  just  seen,  tax  the  stock- 
holders  on  the  full  value  of  their  shares,  irrespective  of  the 
question  whether  the  corporation  has  been  taxed  or  not     In 
other  states,  however,  only  a  portion  of  the  value  of  the  shares 
is  taxable.     Thus  in  Louisiana,  Minnesota  and  Nebraska,  in 
the  assessment  of  shares  of  stock  to  the  holders,  a  proportionate 
part  of  the  value  of  the  real  and  personal  corporate  property 
taxed  withm  the  state  is  deducted  from  each  share.^    In  New 
Hampshire  and  Tennessee,-  as  formerly  in  New  York  in  the 
case  of  banks,^  a  proportionate  part  of  the  real  estate  actually 
taxed  is  deducted  from  each  share.    In  Rhode  Island,  a  propor- 
tionate, part  of  the  real  estate  and  machinery  is  deducted* 
In  Maine,  a  proportionate  part  of  the  machinery,  goods  manu- 
tactured  or  unmanufactured,  and  real  estate  locally  taxable  is 
deducted.^    Finally,  in  New  York,  the  statute  (which  appHes 
however,  only  to  state  and  national  banks)  provides  for  the 
deduction  of  the  assessed  value  of  the  real  estate.    In  all  these 
cases  ordy  the  property  actually  taxable  within  the  state  is 
deducted.    In  Vermont,  on  the  other  hand,  in  the  case  of  manu- 
factunng  companies  the  value  of  the  corporate  realty  and 
personalty   and  in  the  case  of  all  other  corporations  the  value 
of  the  realty,  is  deducted  whether  the  property  be  located  or 
taxable  withm  or  without  the  common  wealth.^     And  in  the 
revised  franchise  tax  on  business  corporations  in  Massachusetts 
the  value  of  t^he  taxable  property  both  within  and  .vithout 
the  state  is  deducted.^ 

A  somewhat  analogous  question  is  that  of  the  taxation  of 
the  shares  of  foreign  corporations  in  the  hands  of  individual 
residents.^    All  those  states  which,  as  we  have  seen,  declare 
It  to  be  justifiable  to  tax  both  corporation  and  shareholder 
of  course  do  not  hesitate  to  tax  the  shares  held  by  residents' 

of  M:;cf^lUT;T2.'^^  "^-  ''-'  '^^"^-  ^^^"-  ''^''>  ^^^P-  -•'  ^^^'  Act 

'N  Y 'WsVfAlrV'^r-  ll:^V  '^'^"-  ^^^''^  ^^^^9'  chap.  9,  sec.  9. 
JN .  Y .  Laws  of  1SG6,  chap.  761 ;  Laws  of  1882,  chap.  409,  §  312     Cf  Peo- 
ple vs  Commissioners  of  Taxes,  69  N.  Y.  91.    These  New  York  lav4'  w^ 
repeded  when  the  special  1%  bank  tax  was  imposed  in  1901     Crsupra, 

*  R.  I.  Pub.  Stat.,  chap.  43,  sec.  12. 
^' Me.  Rev.  Stat.,  tit.  i..  sec.  14,  §3. 

poraVe  TaT;tto?"\f  l"'  '^'^^  f '  ''^'  ^^^    ^^^  ^"  '^^  ^^''  ^oore,  "Cor- 
porate 1  axation,    in  .4  mencnn  Law  Renew  for  1884,  p.  771.    Moore's  state- 
ments are  not  entirely  accurate,  iviooresstate- 
^  Cf.  supra,  p.  205. 


THE  TAXATION  OF  CORPORATIONS 


301 


even  though  the  foreign  corporation  itself  be  taxed.  There  is 
here,  therefore,  no  discrimination  between  domestic  and  foreign 
corporations.  The  other  states  which  declare  the  simultaneous 
taxation  of  corporation  and  shareholder  to  be  dupUcate  taxation, 
may  be  divided  into  two  classes.  Some  of  them  exempt  the 
shares  held  by  residents  in  foreign  corporations,  but  only  whei^ 
the  foreign  corporations  themselves  are  actually  taxed  by  the 
state  of  their  residence.  This  is  the  rule  in  almost  all  of  New 
England  and  in  a  few  other  states,  Uke  California,  Louisiana 
and  New  Jersey.  ^  New  York  goes  still  further,  and  always 
presumes  that  the  foreign  corporation  has  been  taxed  by  the 
state  of  its  residence.^  In  actual  practice  the  custom  is  very 
much  the  same  in  the  other  states  mentioned. 

Some  states,  however,  like  Massachusetts,  make  a  distinc- 
tion between  foreign  and  domestic  corporations,  exempting 
the  shareholders  of  domestic  corporations  (or  taxing  them  only 
through  a  simple  tax  on  the  corporation  itself),  but  assessing 
the  shareholders  of  foreign  corporations  on  their  shares.  This 
practice  has  given  to  considerable  controversy;  ^  but  from  the 
standpoint  of  justice  in  taxation  it  can  be  defended  only  to  a 
very  limited  extent.  According  to  the  principle  of  relative 
economic  interests,  the  shareholder  of  a  foreign  corporation 
is  indeed  under  a  certain  obligation  to  support  the  state  of 
his  residence.  The  proper  way  to  satisfy  the  conflicting  claims 
is,  however,  to  have  the  foreign  state,  which  taxes  the  corpora- 
tion, divide  the  tax  according  to  some  agreement  with  the  state 
where  the  stockholder  resides.  To  tax  the  shareholder  when 
the  foreign  state  already  taxes  the  corporation  seems  inadmis- 
sible; while  entirely  to  exempt  the  shareholder  is  unfair  to  the 
state  of  his  residence.  Some  modus  Vivendi  ought  to  be  arranged ; 
but  so  long  as  it  does  not  exist,  the  New  York  rule  should  be 
followed. 

1  N.  H.  Gen.  Laws  1878,  chap.  53,  sec.  6;  Vt.  Rev.  Stat.,  tit.  ix.,  chap.  12, 
sec.  270;  R.  I.  Pub.  Stat.,  chap.  42,  sec.  10;  N.  J.  Revis.  1877,  p.  115;  sec.  64. 
Cf.  Smith  vs.  Ramsey,  25  Vroom,  546  (1893);  Lockwood  vs.  Weston,  61  Ct. 
211  (1891);  City  of  San  Francisco  v.  Mackey,  22  Fed.  Rep.  602. 

2C/.  Hoyt  vs.  Commissioners,  23  N.  Y.  224  (1861). 

3  This  has  been  the  law  since  1836.  But  up  to  1866  taxes  paid  on  Massa- 
chusetts real  estate  and  machinery  by  the  foreign  corporation  were  deducted 
from  the  tax  on  the  shareholder.  Mass.  Rev.  of  1836,  chap.  7,  sees.  2,  4; 
Dwight  vs.  Boston,  12  Allen,  316.  Cf.  Crocker,  The  Injustice  and  Inexpe- 
diency of  Double  Taxation,  1892;  R.  H.  Dana,  Double  Taxation  Unjust 
and  Inexpedient,  1892.  The  rule  is  the  same  in  Md.  See  Code  of  Public 
General  Laws  (1904),  art.  81,  sec.  156. 


II 


302 


ESSAYS  IN  TAXATION 


Such  is  the  situation  in  regard  to  shares  of  stock.  The 
same  question  can,  of  course,  arise  in  reference  to  mortgage 
bonds.  As  regards  the  simultaneous  taxation  of  corporate 
property  and  the  individual  bondholder,  the  disagreement 
is  less  profound  only  because  corporate  loans  are,  as  we  know, 
rarely  taxed.  In  the  one  commonwealth,  Connecticut,  where 
certain  corporations  pay  what  has  been  pronounced  a  property 
tax  on  the  value  of  their  stocks  and  bonds,  it  has  been  held  not 
to  be  double  taxation  to  assess  the  individual  bondholder  as 
well  as  the  corporation.  ^  Yet  Pennsylvania  comes  to  the  op- 
posite conclusion,  so  far  as  the  bonds  in  this  commonwealth 
are  taxable  only  to  the  corporation  and  not  to  the  individual 
bondholder;  2  for  in  these  states  neither  stockholder  nor  bond- 
holder is  liable.  The  federal  Supreme  Court  virtually  accepts 
the  same  principle  in  deciding  that  a  tax  on  the  bonds  is  a  tax 
on  the  bondholder,^  the  corporation  being  used  merely  as  a 
convenient  means  of  collecting  the  tax.  It  may  be  confidently 
asserted,  therefore,  that  so  soon  as  the  taxation  of  corporate 
loans  becomes  as  general  as  is  now  the  taxation  of  corporate 
stock,  we  shall  be  confronted  by  precisely  the  same  diffi- 
culties. 

If  we  turn  to  Europe,  we  shall  find  a  still  greater  diversity 
of  practice.  Of  the  European  countries,  Switzerland  is  the  only 
one  in  which  some  of  the  cantons  still  tax  corporate  property 
or  capital  stock;  and  in  Switzerland  the  condition  is  just  as 
chaotic  as  with  us.^  Thus  one  set  of  cantons  (Glarus,  Orisons, 
Baselstadt,  Aargau  and  Ticino)  formerly  taxed  only  the  share- 
holder."^ The  intercantonal  compUcations,  however,  soon  as- 
sumed important  proportions;  for  it  frequently  occurred  that 
the  great  majority  of  the  shareholders  resided  in  a  different 
canton  from  the  home  of  the  corporation,  to  the  manifest  det- 
riment of  the  public  revenue  in  the  latter.    Owing  to  this  fact, 

1  Bridgeport  vs.  Bishop,  33  Conn.  187. 

2  Pa.  law  of  June  30,  1885,  §  4.  Before  the  corporation-tax  law  of  1880 
the  same  pnnciple  applied  to  all  corporations  in  New  York.  Before  the 
law  of  1896  this  principle  applied  also  in  Maryland. 

»  State  Tax  on  Foreign-held  Bonds,  15  Wall.  300. 

*  Cf.  in  general,  Schanz,  Die  Steuern  der  Schweiz,  i.,  pp.  90-99;  and  ZUr* 
Cher,  Kntische  Darstellung  betreffend  das  Verbot  der  DoppeWesteuerung, 
pp.  36-41.    Cf.  the  caution  on  page  260,  supra. 

'This  was  true  in  Orisons  from  1871  to  1881;  in  Baselstadt  up  to  1879; 
m  Aargau  to  1885;  in  Ticino  to  1890.    See  the  respective  laws  in  Schanz 
op.cU.,  iii.,  p.  247;  ii.,  p.  40;  v.,  p.  4,  §  20;  iv.,  p.  281.    For  Glarus,  se^ 
ibid.,  v.,  p.  175. 


THE  TAXATION  OF  CORPORATIONS 


303 


the  above  system  has  now  been  abandoned  by  all  the  cantons 
except  Glarus. 

A  second  set  of  cantons,  which  tax  the  corporate  property 
and  income,  deduct  the  shares,  dividends  or  interest  in  the 
hands  of  the  security  holders  of  domestic  corporations  from  this 
taxable  property  or  income.  Such  is  the  law  in  Schaffhausen, 
Bern,  Vaud,  Aargau  and  Uri,^  and  is  the  practice  in  Baselstadt, 
Schwyz  and  Zug.'^  The  security  holders  of  foreign  corporations 
are,  however,  not  exempted  from  taxation.  Orisons,  moreover, 
has  the  curious  provision  that  while  corporations  are  taxed 
directly,  only  the  shareholders  of  domestic  corporations  are 
exempt,  the  bondholders  of  both  domestic  and  foreign  corpora- 
tions being  taxable  equally  with  the  corporation.^  In  some 
of  the  above  cantons,  as  in  Uri,  Bern  and  Aargau,  the  security 
holders  are  exempt  only  from  commonwealth  taxes,  but  are 
liable  for  local  burdens.^  It  is  the  same  system,  it  will  be  ob- 
served, as  in  Massachusetts. 

A  third  set  of  cantons  do  not  shrink  from  double  taxation, 
but  tax  both  corporation  and  shareholder.  Such  is  the  law  in 
Baselstadt  and  Neuchatel.^  On  this  point  the  decisions  of  the 
Federal  Council  are  contradictory.^  Finally,  a  fourth  set — 
and  this  seems  the  growing  tendency  in  Switzerland — seek  to 
divide  the  tax  between  corporation  and  shareholder.     Thus 

^  Schaffhausen,  Steuergesetz  vom  29  Sept.  1879,  arts.  9  and  10,  in  Schanz, 
v.,  p.  259;  ii.,  p.  109;  Bern,  Vollziehungsordnung,  vom  22  Marz,  1878,  §  3, 
in  Schanz,  v.,  p.  83;  Vaud,  loi  d'imp6t  sur  la  fortune  mobiliere  du  21  aotlt, 
1862,  art.  6,  in  Ziircher,  op.  cit.,  p.  38,  cj.  Schanz,  iv.,  p.  158  (true  only  to 
1886);  Aargau,  Grossratliche  Verordnung  liber  den  Bezug  der  direkten 
Staats-  und  Gemeindesteuer,  vom  26  November,  1885,  §  7,  in  Schanz,  v., 
p.  15;  Uri,  Steuergesetz  vom  10  Mai,  1886,  art.  5,  in  Schanz,  v.  p.,  375. 

2  For  these  cantons,  see  the  judicial  decisions  in  Ziircher,  op.  dt.,  p.  38. 

'  Graublinden,  Steuergesetz  vom  28  August,  1881,  §  16;  in  Schanz,  v., 
p.  192. 

*  See  the  respective  provisions  in  Schanz,  v.,  p.  375,  art.  5;  88,  §  7;  15,  §  7; 
and  19,  §  18. 

^  Bern,  Gesetz  betreflfend  die  direkten  Steuern,  vom  31  Mai,  1880,  §§  1,  8; 
and  Gesetz  betreffend  die  Besteuerung  der  anonymen  Erwerbsgesellschaften, 
vom  14  Oct.,  1889,  §  1;  in  Schanz,  v.,  pp.  41,  43,  49;  Neuchdtel,  Loi  sur 
rimp6t  direct  du  18  Oct.,  1878,  art.  5  and  art.  6,  §  3;  in  Schanz,  v.,  pp.  218, 
219.  Schanz,  i.,  p.  95,  also  includes  Zug  in  this  class,  but  erroneously,  as 
appears  from  the  official  decision  quoted  in  Ziircher,  op.  dt.,  p.  38. 

"  See  the  several  cases  in  Schreiber,  Verbot  der  Doppelhesteuerung,  pp. 
199-202.  He  opposes  double  taxation.  On  the  other  hand,  see  Meili, 
"  Rechtsgutachten  iiber  die  Besteuerung  der  Aktiengesellschaften,"  in  the 
Zeilschrift  filr  schweizerische  Gesetzgebung,  v.,  p.  489.  See  also  Ziircher, 
op.  cit.,  p.  40. 


304 


ESSAYS  IN  TAXATION 


Geneva  taxes  the  corporation  on  its  realty  and  the  share- 
holder on  his  shares;  but  does  not  permit  the  shareholder 
to  make  a  proportionate  reduction  for  the  corporate  realty 
already  taxed,  as  is  the  case  in  New  York,  New  Hampshire 
and  Tennessee.!  Appenzell  taxes  the  shareholders  on  the 
market  value  of  their  shares,  but  the  corporations  only  on 
their  reserve  funds.  ^  In  Zurich,  the  shareholders  are  taxed 
on  their  shares;  the  corporations  on  their  reserve  fund  and  their 
income  in  excess  of  five  per  cent  of  the  capital.  The  income 
below  five  per  cent  is  not  taxed  because  it  is  supposed  to  be 
hit  by  the  tax  on  the  shareholders.  For  purposes  of  local 
taxation,  however,  the  shareholders  are  assessed  on  their  sharcL>, 
but  the  corporations  pay  only  on  their  realty  and  on  a  pro- 
portionate part  of  their  reserve  funds.^ 

The  1885  "draft  of  a  federal  law  on  double  taxation"  sought 
to  divide  the  tax  between  corporation  and  shareholder  in  a 
new  way.  The  stockholder  was  to  be  assessed  by  the  place  of 
his  domicile  on  the  market  value  of  his  shares  up  to  the  amount 
actually  paid  or  on  the  dividends  up  to  five  per  cent;  while  the 
corporation  was  to  pay  only  on  the  value  of  the  capital  or 
dividends  above  this  figure.-*  Although  this  particular  draft 
failed  of  adoption  because  of  the  jealousy  of  the  individual 
cantons  at  the  supposed  infringement  of  their  state  rights,  the 
principle  has  nevertheless  been  accepted  by  a  single  common- 
wealth,~Vaud.  In  this  canton  all  shares  which  stand  above 
par  and  all  bonds  which  pay  more  than  four  per  cent  interest 
are  assessable  to  the  individual  owners  at  their  par  value.  The 
corporations  are  assessed  only  on  the  surplus  al)ove  the  capital 
stock,  i.e.  the  reserve  and  sinking  funds  and  other  sums  earned 
during  the  year.^    Such  a  clumsy  method  is  not  likely  to  be 

1  Geneve,  Loi  g^ndrale  sur  les  contributions  publiques,  du  9  novembre 
1887,  arts.  300,  324;  in  Schanz,  v.,  pp.  151,  155.  ' 

2  Vollziehungsverordnung  liber  die  Ausfuhrung  von  Art.   16  der  Ver- 
fassung  betreffend  das  Steuerwesen  (April  5,  1880),  arts.  5,  6.    Schanz,  v 
p.  26. 

3  Gesetz  betrefiFend  die  Vermogens-,  Einkommen-  und  Aktivburgersteuer 
vom  24  April,  1870,  §§  2,  4;  Anleitung  betr.  das  bei  der  Selbsttaxation  .  . 
zu  beobachtende  Verfahren,  §  6;  Gesetz  betreffend  das  Gemeindewesen 
§  137,  d,  e.    Schanz,  v.,  pp.  423,  424,  431,  439;  ii.,  p.  435.    Cf.  Zurcher.  op. 
cit.,  p.  39. 

^  Bundesgesetzentwurf  vom  6  Marz,  1885.    In  Schanz,  i.,  p.  96. 

*  "Les  actions  et  parts  de  soci^t^s  qui  ont  leur  si^ge  en  Suisse  et  dont  le 
cours  d  la  bourse  est  sup^rieur  d  leur  valeur  nominale  ou  qui  rapport ent  un 
int^ret  sup^rieur  au  4  per  cent  de  cette  valeur,  sont  corapt^es  dans  la  for- 


THE  TAXATION  OF  CORPORATIONS 


305 


adopted  in  this  country.  On  the  other  hand,  in  St.  Gallen  the 
stockholder  is  taxed  on  his  shares,  the  corporation  on  its  income 
in  excess  of  four  per  cent  interest  on  the  capital,  i  We  see,  then, 
that  Switzerland  has  no  settled  practice. 

In  the  other  important  European  countries  the  prevailing 
system  as  we  have  learned  is  that  of  the  taxation  of  incomes. 
The  same  questions  arise  as  to  the  taxation  of  corporate  prof- 
its and  of  shareholders'  or  bondholders'  income. 

In  England,  the  income  tax  payable  on  annual  profits  or 
gains  according  to  schedule  D  of  the  income  tax  is  advanced 
by  the  corporation,  and  is  deducted  by  it  from  the  dividends 
or  interest  due  the  security  holders,  who  are  then  to  that  extent 
exempt  from  the  income  tax.^  In  Austria  the  facts  are  similar 
to  those  in  England.^  In  Italy,  the  law  requires  the  income 
tax  to  be  paid  by  the  corporation,  but  does  not  interfere  with 
the  adjustment  of  the  tax  between  the  company  and  the  share- 
holders. Nothing  would  prevent  the  corporation  from  deduct- 
ing the  tax  from  the  dividends;  but  in  fact,  it  is  the  custom  for 
the  corporation  to  charge  the  tax  to  expense  account,  with  the 
same  result  for  the  shareholder.  The  latter  is  not  assessable  on 
his  dividends  because  the  law  expressly  forbids  double  tax- 
ation of  this  kind.  4  As  regards  bondholders  the  companies 
are  required  to  pay  the  tax  on  coupons,  with  a  right  to  recoup 
from  the  bondholders.^  The  companies  generally  do  not  de- 
tune mobili^re  du  porteur  ou  des  creanciers  pour  leur  valeur  nominale 
seulement.  .  .  .  L'avoir  net  (reserves  et  amortissements  compris)  des 
socidtes  ...  est  compt6  dans  la  fortune  mobiliere  de  ces  soci^tes  pour 
tout  ce  qui  excdde  Ic  capital  social."  Loi  d'imp6t  sur  la  fortune  mobilidre, 
etc.,  du  21  aout,  1886,  art.  11.    Schanz,  v.,  p.  387;  iv.,  p.  158. 

1  Gesetz  ubor  die  Einkommensteuer,  sowie  Uber  die  Besteuenmg  der 
anonymen  Gesellschaften  (1863),  art.  5;  Verordnumg  uber  Bcsteuerung  der 
anonymen  Gesellschaften  vom  2>s  Jan.,  1867,  arts.  4,  11.  Schanz,  v.,  pp. 
309,  311.  »      '  t-H 

2  Ellis,  A  Guide  to  the  Income  Tax  Acts,  pp.  78-112. 

'Wagner,  "Direkte  Steuern,"  §  103,  in  Schonberg,  Handbuch  der  poll- 
tischen  Oekonomie,  iii.,  p.  307.  Wagner's  discussion  of  these  points  is 
not  adequate  or  conclusive. 

*  "Ne  saranno  soltanti  eccettuati  [in  the  taxable  income]  i  redditi  che  per 
disposizione  della  presente  legge  siano  gid  una  volta  assoggettati  all'  im- 
posta  in  essa  stabilita."    Legge  per  1'  imposta  sui  redditi  di  ricchezza  mobile 
art.  8,  §  2.  ' 

.  .  .  Le  societd  anonime  dichiareranno  non  solo  i  redditi  propri,  ma 
eziando  .  .  .  gH  interessi  dei  debiti  da  loro  contratti  e  delle  obbligazioni  da 
loro  emesse,  e  pagheranno  direttamente  1'  imposta  relativa  anche  a  questi 
ultimi  redditi,  rivalendosene  sui  loro  assegnatori  e  creditor!  mediante  rite- 
nuta."    Ibid.,  art.  15. 


306 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


307 


duct  an3rthmg  from  the  coupons,  but,  as  with  dividends,  charge 
the  tax  to  expense  account.  In  this  case  it  would  seem  as  if 
the  stockholders  were  liable  for  the  tax,  since,  strictly  speak- 
ing, it  would  have  to  come  ultimately  out  of  the  stockholders' 
dividends,  and  not  out  of  the  bondholders'  interest,  which  is 
legally  fixed.  In  actual  practice,  however,  this  distinction  is 
not  observed.  The  bondholders,  moreover,  are  not  assessable 
if  the  corporation  has  paid  the  tax.  In  France,  the  tax  sur  le 
revenu  des  valeurs  niobilieres,  so  far  as  it  applies  to  the  dividends 
or  interest  of  corporate  securities,  may  be  primarily  collected 
from  the  company  and  then  deducted  by  it  from  the  sums  due 
the  security  holders,  as  in  England;  or  the  tax  may  be  assumed 
directly  by  the  companies,^  as  in  Italy. 

In  Germany,  every  possible  plan  has  been  tried,  without 
reaching  any  definite  or  uniform  conclusions.  The  matter  is, 
moreover,  further  complicated  by  the  fact  that  corporations 
like  individuals  must  pay  a  business  tax  (Gewerhesteuer) ,  some- 
what akin  to  licenses  or  occupation  taxes  in  the  Southern  states 
of  the  American  Union.  In  a  number  of  German  states  (Olden- 
burg, Brunswick,  Gotha,  Schaumburg-Lippe,  Waldeck  and 
Liibeck)  the  corporations  pay  no  income  tax,  but  the  share- 
holders and  bondholders  are  taxed.  ^  In  other  states,  like  Saxe- 
Weimar,  Lippe-Detmold,  Bremen  and  Hesse,  the  corporations 
are  assessed,  but  the  shareholders  and  bondholders  are  exempt.^ 
Even  in  these  commonwealths,  however,  the  definitions  of 
corporate  net  income  do  not  tally.  In  most  of  the  remaining 
states,   like  Prussia,   Saxony,   Baden,   Bavaria,   Wiirtemberg, 

*  Tanqu^rey,  TraitS  .  .  .  de  Vimpdt  sur  le  revenu  des  valeurs  mohilihres, 
pp.  143-150;  Vignes,  Traiie  desimpots  en  France,  i.,  pp.  405-409;  Kauff- 
mann,  Die  Finanzen  Frankreichs,  pp.  288,  291. 

'C/.  the  details  in  Antoni,  "Die  Steuersubjecte  im  Zusammenhalte  mit 
der  Durchf iihrung  der  AUgemeinheit  der  Besteuerung  nach  den  in  Deutseh- 
land  geltenden  Staatssteuergesetzen,"  in  Finanz-Archiv,  v.,  pp.  916-1033, 
especially  1010.  The  statements  in  this  paragraph  are  true  of  the  situation 
in  1895.    For  later  changes  see  the  work  of  Blum,  cited  supra,  p.  262,  note  3. 

'  Sachsen- Weimar,  Gosctz  iiber  die  allgemeine  Einkommensteuer,  von  19 
Marz,  1869  [with  amendments  of  1874, 1877  and  1880],  §§  48  and  4.  Printed 
in  Finanz-Archiv,  ii.,  p.  932. — Lippe-Detmold,  Gesetz  die  Klassen-  und 
klassifizierte  Einkommensteuer  betreflfend,  von  1868  [with  amendments  of 
1882  and  1885],  §§  1,  7. — Bremen,  Einkommensteuergesetz  von  17  Dez., 
1874,  §  5. — Hessen,  Gesetz  von  1884,  die  EinfUhrung  der  Einkommensteuer 
betreffend,  arts.  4,  19.  In  Finanz-Archiv,  ii.,  pp.  383-434.  For  Hesse  in 
particular,  see  Schanz,  "Die  direkten  Steuem  Hessens  und  deren  neueste 
Reform,"  Finanz-Archiv,  ii.,  pp.  235-529.  Also  Conrad's  Jahrbxicher,  xii., 
p.  10. 


Mecklenburg,  Anhalt  and  the  other  minor  commonwealths, 
both  corporation  and  security  holder  are  taxed— the  corporation 
on  Its  income  or  business,  the  individual  on  his  income  from  the 
corporate  security,  i  In  one  case  (Baden)  the  same  income 
was  until  recently  taxed  four  times— that  is,  the  corporation 
paid  a  business  tax  (Gewerhesteuer)  and  an  income  tax,  while 
the  mdividual  shareholder  or  bondholder  paid  not  only  an 
income  tax  but  also  a  tax  on  the  interest  of  his  capital  invested 
in  the  bonds  or  stock  (Kapitalrentensteuer)  .^  In  the  original 
draft  of  the  bill  to  reform  the  Prussian  law,  this  same  quadruple 
taxation  was  proposed;  ^  but  its  injustice  was  so  manifest  that 
the  project  failed.  It  was  also  proposed  in  Hesse,  but  without 
success.  In  1906  the  supplemental  property  tax  took  the  place 
of  the  business  tax  and  of  the  capital  tax  in  Baden,  but  as  both 
corporations  and  individuals  are  subject  to  this  property  tax, 
the  quadruple  system  virtually  continues.^  Baden,  therefore^ 
is  the  only  state  in  the  world  which  can  pride  itself  upon  assess- 
ing the  same  subject  four  times. 

We  see,  thus,  that  in  Europe  there  is  no  settled  practice  at 
all,  although  the  tendency  seems  to  be  to  tax  the  corporation 
and  to  exempt  the  individual  on  his  income  from  corporate 
investments.  Is  this  the  correct  policy?  Is  it  true  that  in  tax- 
ing the  corporation,  whether  on  property  or  on  income,  we  are 
taxing  the  individual  holder  of  the  shares  or  bonds? 

This  brings  us  to  the  pith  of  the  question.  What  is  the  in- 
cidence of  the  corporation  tax?  Where  does  the  burden  really 
fall?    This  question  has  never  yet  received  adequate  attention!^^ 

^Sachsen,  Einkommensteuergesetz  von  1878,  §  4.— Bayern,  Einkom- 
mensteuergesetz von  1881,  art.  1,  §  15.  In  Seisser,  Die  Gesetze  uber  die 
direkten  Steuem  im  Kgr.  Bayern,  i.,  158.— Wurtemberg,  Gesetz  von  1872, 
art.  1,  §  3.  In  Sammlung  wurttemhergischer  Steuergesetze  (1883). — Meck- 
lenburg, revidiertes  Contributionsedict  von  1874,  §§  13,  45.— Baden, 
Gesetz  von  1884,  die  EinfUhrung  einer  allgemeinen  Einkommensteuer 
betrefTend,  art.  5.  In  Finanz-Archiv,  ii.,  pp.  361-394.  Cf.  Philippsberg, 
Gesetz  uber  die  direkten  Steuem  in  Baden  (1888).— Anhalt,  Gesetze  von 
1886,  die  EinfUhrung  einer  Einkommensteuer  .  .  .  betreffend,  §§2,  4. 
Cf.  Schanz,  "Die  Steuem  im  Herzogthum  Anhalt,  ihre  Entwickelung  und 
neueste  Reform,"  Finanz-Archiv,  iv.,  pp.  961-1070,  especially  1016.  For 
Prussia,  see  Einkommensteuergesetz  von  1891,  §§  12  b,  14. 

^Finanz-Archiv,  ii.,  p.  320.  Cf.  Lewald,  "Die  direkten  Steuem  in 
Baden,"  m  Finanz-Archiv,  iii.,  p.  350. 

'  Einkommensteuergesetzentwurf  von  1883. 

*  Cf.  Blum,  op.  cit.,  pp.  52-56. 

^  The  nearest  approach  to  a  discussion  of  this  question  is  to  be  found  in 
Helferich,  "Ueber  die  EinfUhmng  einer  Kapitalsteuer  in  Baden,"  in  Tu- 


4t' 


308 


ESSAYS  IN   TAXATION 


VI.  Incidence  of  the   Tax 

It  is  generally  assumed  that  a  tax  on  a  corporation  is  a  tax 
on  the  shareholder  or  bondholder.  But  as  has  already  been 
pointed  out/  a  distinction  must  be  drawn  between  the  original 
holder  and  the  recent  purchaser  of  corporate  securities.  Under 
certain  circumstances  the  burden  of  a  tax  is  not  borne  by  the 
purchaser  of  new  corporate  securities,  but  falls  entirely  on  the 
original  holder  of  the  old  securities  issued  before  the  tax  was 
imposed.  If  a  corporation  is  taxed  on  its  income,  and  if  no 
similar  tax  is  levied  on  other  corporations  or  on  other  securities, 
the  stock  will  fall  in  value  and  the  new  purchaser  who  buys  at 
the  reduced  price  really  buys  free  of  tax.  Although  he  pays  the 
tax,  the  amount  of  the  tax  is  thus  discounted  in  the  depreciation 
of  the  security.  With  the  lapse  of  time  and  the  fluctuations  in 
the  market  the  original  holders  all  disappear.  Hence  at  any 
given  time  an  exclusive  income  tax  levied  only  on  the  corix)ra- 
tion  and  not  on  the  shareholder  does  not  affect  anyone  except 
the  original  holders  who  bought  before  the  imposition  of  the 
tax.  It  is  only  a  question  of  time  until  this  class  of  original 
holders  disappears  entirely. 

As  to  bondholders,  the  argument  is  precisely  the  same  if 
the  corporation  is  empowered  to  deduct  the  tax  from  the  in- 
terest. The  lower  rate  of  interest  is  discounted  in  the  deprecia- 
tion of  the  bond,  so  that  the  new  purchaser  loses  nothing.  More- 
over, in  those  cases  where,  as. we  have  seen,  the  tax  is  borne 
by  the  corporation  and  not  deducted  from  the  interest,^  the 
bondholder  does  not  suffer  at  all,  except  in  so  far  as  it  somewhat 
lessens  the  security  of  the  mortgage. 

Of  course  this  is  more  or  less  true  of  all  new  taxes  under 
certain  conditions.  By  virtue  of  what  is  called  the  capitaliza- 
tion of  taxation  a  new  tax  may  affect  the  original  owner  of  the 

binger  Zeitschrift  fur  die  gemmmte  Staatstoiasenschaft,  1846,  pp.  291-324, 
especially  315  et  seq. 

^  Supra,  p.  108. 

2  During  the  Civil  War,  when  a  federal  tax  was  imposed  on  the  coupons 
and  dividends  of  certain  corporations,  many  corporations  declared  these 
*'free  of  tax,"  and  refused  to  withhold  the  amount  from  the  sums  due  to  the 
bondholders  and  stockholders.  They  simply  aasumed  the  tax  and  charged 
it  to  expense  account,  asserting  that  while  the  law  authorized,  it  did  not 
direct,  them  to  withhold  the  tax.  See  Internal  Revenue  Record,  vol.  i.  (1865), 
p.  153. — The  practice  was  thus  the  same  as  in  Italy  to-day. 


THE  TAXATION  OF  CORPORATIONS 


309 


taxable  article  more  than  the  new  purchaser.  In  the  case  of 
direct  taxes  the  original  holder  may  be  injured  while  the  future 
purchaser  may  discount  the  tax  in  the  depreciation  of  the  article. 
In  the  case  of  indirect  taxes  the  reverse  is  true,  for  the  effect 
of  the  tax  often  is  to  increase  the  price.  The  lucky  owner  who 
holds  the  commodity  before  the  imposition  of  the  tax  then 
reaps  the  benefit  of  the  rise  in  price.  The  point  which  is  usually 
overlooked,  however,  is  the  question  whether  the  new  tax  is 
general  or  partial.  If  the  direct  tax  applies  to  all  subjects  in 
the  class  and  to  all  classes,  then  the  new  purchaser  is  taxed 
equally  with  the  original  owner.  J^orLlLtheJax  is  general  there 
will  be  no  depreciation  in  value.  It  is  only  when  the  tax  is 
partial,  assessing  some  articles  in  the  class  more  than  others, 
that  it  may  under  certain  conditions  be  capitalized,  and  that  a 
decrease  in  the  value  of  the  overtaxed  article  may  ensue. 

If  we  apply  this  principle  to  the  corporation  tax,  we  reach 
the  following  results:  If  the  corporation  tax  simply  forms  a 
part  of  a  general  scheme  of  income  taxation,  as  in  England 
or  in  Italy,  the  shareholder  must  indeed  be  exempted.  Since 
the  tax  affects  the  interest  on  all  investments,  not  simply  on 
corporate  securities,  the  investor,  whose  interest  was  cut  down, 
will  not  find  any  non-taxable  securities  of  equal  desirability 
from  which  he  can  obtain  the  original  rate  of  interest.  In 
such  a  case,  therefore,  the  tax  on  the  corporation  is  a  tax  on  the 
investor.  To  tax  both  corporation  and  individuals  on  their 
income  would  really  be  double  taxation.  On  the  other  hand, 
if  the  corporation  tax  is  partial — i.  e.  if  only  corporate,  and  not 
other,  securities  are  taxed,  or  if  only  a  few  classes  of  corpora- 
tions are  taxed — then  the  taxation  of  the  corporation  is  not 
sufficient  to  reach  the  purchaser.  He  will  practically  escape, 
because  the  freedom  of  investing  in  non-taxable  securities  will 
enable  him  to  discount  the  tax  in  the  price  he  pays.  If  a  general 
income  tax  is  imposed,  it  will  not  be  valid  for  the  new  purchaser 
of  corporate  securities  to  claim  exemption  on  the  ground  that 
a  tax  has  already  been  imposed  on  his  particular  corporation. 
To  tax  both  the  corporation  by  a  special  corporation  tax  and 
the  shareholder  by  a  general  income  tax  in  such  a  case  is  not 
unjust  or  double  taxation.  To  tax  the  corporation  alone  would 
in  reahty  not  burden  the  shareholder  who  purchased  after  the 
tax  was  imposed.  An  additional  tax  on  the  new  shareholder 
in  common  with  all  other  recipients  of  income  would  thus  really 
constitute  no  injustice  to  him.    The  practical  difl[iculty  of  course 


I 


310 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


311 


would  consist  in  distinguishing  between  the  old  and  the  new 
owners. 

Thus  far  we  have  been  discussing  the  incidence  of  the  cor- 
poration tax  in  a  scheme  of  income  taxation.  How  does  the 
matter  stand  in  the  case  of  a  property  tax? 

The  principle  is  the  same.  Let  us  a^ume  that  in  addi- 
tion to  the  corporation  tax  a  general  property  tax  is  actually 
levied  on  all  individuals.  The  corporation  would  then  pay 
the  first  tax,  and  the  individuals  would  pay  the  second  tax 
upon  corporate  shares  and  bonds.  This  would  indeed  be 
duplicate  taxation,  but  only  on  the  assumption  that  the  cor- 
poration tax  is  imposed  on  all  corporations  in  general,  and  that 
the  property  tax  is  actually  assessed  on  all  kinds  of  property. 
In  such  a  case  it  would  be  unjust  to  tax  both  corporation  and 
shareholders.  This  is  the  assumption  made  by  most  of  the 
American  commonwealths,  which,  as  we  have  seen,  generally 
exempt  the  shares  when  the  corporate  property  or  franchise 
is  taxed. 

The  assumption,  however,  is  not  always  correct.     In  the 
first  place,  only  special  classes  of  corporations  are  sometimes 
taxed.     Secondly,  the  general  property  tax  we  know  to  be 
general  only  in  name,  for  by  far  the  larger  part  of  personal 
property  or  of  mvestments  in  the  hands  of  individuals  escapes 
taxation.    Under  these  conditions  the  matter  may  be  entirely 
different.    If  the  tax  be  imposed  on  only  a  particular  class  of 
corporations,  and  if  the  conditions  are  not  such  as  to  bring  about 
a  shifting  of  the  tax  to  the  consumer  of  the  commodities  pro- 
duced, the  corporation  tax  will,  if  all  other  securities  escape 
assessment,  be  discounted  in  the  lower  market  value  of  the 
shares,  because,  other  things  being  equal,  the  value  of  new  in- 
vestments will  vary  in  proportion  to  the  net  profits  to  be  de- 
rived therefrom.    Although  the  corporate  tax  reduces  the  divi- 
dends, the  reduced  dividends  on  the  reduced  value  will  yield 
to  new  investors  as  large  a  percentage  as  did  the  larger  dividends 
on  a  property  of  greater  value—greater  because  untaxed.    Thus 
where  there  is  only  a  partial  tax  of  this  kind  on  personal  prop- 
erty a  special  corporation  tax  puts  the  new  purchaser  of  shares 
in  the  same  position  as  if  he  owned  non-taxable  property,  t.  e. 
it  virtually  imposes  no  additional  burden  on  any  of  the  share- 
holders except  the  original  owners.    In  the  case  of  bondholders 
where  the  corporation  tax  is  deducted  from  the  interest,  this  is 
equally  true.     When  the  corporation  tax  is  assumed  by  the 


corporation  and  not  deducted  from  the  interest — the  almost 
universal  rule  in  the  United  States — the  bondholders  are  not 
reached  at  all,  except  in  the  very  indirect  way  that  they  may  be 
exposed  to  an  ultimate  diminution  in  the  security  of  their  Uen. 
The  tax  as  such  does  not  strike  them;  their  property,  consisting 
of  corporate  bonds,  goes  scot-free.  A  property  tax  or  franchise 
tax  on  the  special  corporation,  under  the  given  conditions,  is 
really  not  an  additional  burden  on  the  individual  holder  of 
corporate  securities  or  at  all  events  not  on  all  the  individual 
security  holders. 

The  practical  conclusion  applicable  to  the  United  States 
to-day  is  as  follows: 

If  the  corporation  tax  is  to  be  utilized  as  a  means  of  reaching 
the  faculty  of  the  security  holder,  rather  than  of  the  fictitious 
person  known  as  the  corporation,  it  is  necessary  to  generalize 
the  tax — ^to  levy  a  general  tax  on  corporations,  as  a  few  states 
are  now  beginning  to  do.  Furthermore,  the  corporation  tax 
must  be  regarded  simply  as  a  part  of  a  larger  system  of  taxa- 
tion, the  constituent  elements  of  which  must  endeavor  to  reach 
the  other  sources  of  the  taxpayer's  ability.  The  corporation 
tax,  in  other  words,  must  be  supplemented  by  other  taxes, 
both  state  and  local,  in  order  that  these  taxes  combined  may 
stand  in  some  proportion  to  the  revenue  of  the  individual. 
Then,  but  only  then,  will  it  always  be  double  taxation  to  assess 
the  corporation  as  well  as  the  security  holder.  So  far  as  there 
is  a  decided  tendency  to  generalize  the  corporation  tax,  the  trend 
of  American  legislation,  in  seeking  to  avoid  double  taxation, 
is  in  the  right  direction. 

Til.  Local  Taxation 

Up  to  this  point  we  have  discussed  chiefly  the  state  taxa- 
tion of  corporations.  But  the  lesser  governmental  divisions 
also  have  their  claims  to  urge,  especially  in  modern  times  when 
local  needs  outweigh  so  heavily  those  of  the  states.  There 
are  no  less  than  five  different  methods  of  taxing  corporations 
for  local  purposes  in  the  United  States.    These  are  as  follows: 

1.  A  local  general  property  tax. 

2.  A  local  corporate  franchise  tax  in  addition  to  the  general 
property  tax. 

3.  A  local  tax  on  real  estate. 

4.  No  local  tax  at  all. 


312 


ESSAYS  IN  TAXATION 


THE  TAXATION  OF  CORPORATIONS 


313 


I  't 


I 


5.  A  distribution  of  the  state  tax  on  corporations  to  local 
districts. 

The  first  plan,  that  of  the  local  property  tax,  is  still  usual, 
even  in  some  of  the  commonwealths  that  have  abandoned  the 
general  property  tax  on  corporations  for  state  purposes.  Cor- 
porate property  is  in  some  cases  measured  by  the  capital  stock. 
In  New  York,  for  example,  while  banks,  insurance  and  tele- 
graph companies  are  taxed  according  to  special  laws,  in  the 
case  of  other  domestic  corporations  the  tax  is  levied  at  the 
usual  rate  of  the  local  tax  on  the  actual  value  of  the  capital 
stock,  together  with  the  surplus  profits  or  reserve  funds  ex- 
ceeding ten  per  cent  of  the  capital,  after  deducting  the  assessed 
value  of  the  real  estate  and  of  the  shares  of  stock  in  other 
taxable  corporations.  ^  Foreign  corporations,  however,  are 
taxable  only  on  the  sums  actually  invested  in  the  state. 

The  second  method,  that  of  a  corporate  franchise  tax  in 
addition  to  the  local  property  tax,  is  found  in  Kentucky,  where 
the  tax  on  the  franchises  of  certain  corporations  may  be  levied 
also  by  the  local  divisions.  Somewhat  analogous  to  this  are 
the  local  Hcenses  which  in  many  of  the  Southern  states  are 
imposed  on  corporations  as  well  as  on  individuals  in  addition 
to  the  state  Ucenses. 

The  third  method,  that  of  a  local  tax  on  real  estate  only, 
is  becoming  more  and  more  common,  especially  in  the  com- 
monwealths which  impose  a  separate  state  tax  on  certain  kinds 
of  corporations,  like  transportation  and  insurance  companies. 
It  is  likewise  the  custom  with  banks,  which  pay  a  local  real 
estate  tax,  and  also  advance  the  tax  on  shares  assessed  to  the 
shareholders. 

The  fourth  plan,  the  exemption  from  local  taxation,  is  found 
in  a  few  states  which  impose  a  franchise  tax  on  certain  classes 
of  corporations.  The  only  state  which  has  a  general  corpora- 
tion tax  law  in  lieu  of  local  taxation  is  Pennsylvania.  Even 
there  certain  classes,  like  purely  manufacturing  companies, 
which  are  excepted  from  the  operation  of  the  general  corporation 
tax,  are  subject  to  local  taxation  on  their  real  estate.  Further- 
more the  real  estate  of  railroad  and  other  transportation  and 
transmission  companies,  not  necessary  to  the  exercise  of  their 
franchise,  may  be  taxed  by  the  local  bodies.  Some  cities  are 
also  permitted  by  their  charters  to  tax  the  real  estate  of  certain 
corporations,  and  the  courts  have  ruled  that  the  general  cor- 

*  Laws  of  1857,  chap.  456,  vol.  ii.,  p.  i. 


poration  tax  law  does  not  deprive  these  municipalities  of  the 
right  to  tax  their  real  estate.^  Finally,  the  tax  on  banks  and 
insurance  companies,  being  in  some  cases  practically  a  tax  on 
incomes,  does  not  exempt  their  real  estate  entirely  from  taxa- 
tion. Practically,  therefore,  in  Pennsylvania,  as  by  statute  in 
California,  the  exemption  from  local  taxation  appHes  only  to 
public-service  corporations. 

The  fifth  and  last  method  of  local  taxation,  the  distribution 
of  the  state  corporation  tax  to  local  bodies,  is  found  in  the  case 
of  railroads  in  several  states  like  Maine,  Mississippi,  West 
Virginia  and  in  the  case  of  corporations  in  general  in  Massachu- 
setts. But  in  some  of  these  states  the  local  bodies  levy  addi- 
tional taxes,  as  in  Massachusetts  on  real  estate  and  machinery. 
_Ofall_thesesystems_the  third  is  clearly  the  best.  All  cor- 
porations  with  tire^ossibIe~exceptTon~ofTEose  enjoying  special 
municipal  franchises  should  be  made  to  pay  a  local  tax  on  their 
real  estate;  first,  because  it  is  mainly  the  realty  which  comes  into 
direct  relations  with  the  purely  local  functions;  and  secondly, 
because  the  attempt  to  tax  personalty  would  immediately 
lead  again  to  the  uncertainty  and  confusion  from  which  it  has 
been  the  policy  of  all  recent  reforms  to  extricate  us.  But  in 
the  case  of  public-service  corporations,  with  contiguous  pieces 
of  real  estate  in  many  localities,  experience  has  shown  the  ad- 
visability of  central  assessment,  with  a  unit  rule,  even  if  the 
proceeds  of  the  real  estate  tax  accrue  in  a  fixed  ratio  to  the 
locahties. 

The  New  York  system,  therefore,  is  triply  unwise:  first, 
because  it  imposes  a  state  tax  on  corporate  real  estate;  secondly, 
because  it  further  imposes  a  local  tax  on  the  total  corporate  prop- 
erty; and  thirdly,  because  the  real  estate  of  public-service,  like 
other,  corporations  is  separately  assessed  at  ridiculously  varying 
sums,  by  the  local  officials.  The  former  Minnesota  or  the  Con- 
necticut system,  as  applied  to  railroads,  is  unwise  because  it  im- 
poses no  local  tax  at  all.  The  system  as  formerly  practiced  in 
Washington  was  unwise  because  it  imposed  only  a  single  state 
tax  which  was  in  part  redistributed  to  the  local  divisions. 
AH  these  methods  err  because  they  fail  to  analyze  the  deeper 
principles  that  underlie  corporate  taxation. 

The  plan  of  levying  a  general  state  tax  and  distributing  a 
part  of  the  proceeds  to  the  counties  or  municipalities  con- 
tains a  fruitful  idea.  It  is  already  in  vogue  in  an  incomplete 
1  Pennsylvania  R.  R.  Co.  vs.  Pittsburgh,  104  Pa.  State,  522  (1883). 


314 


ESSAYS  IN  TAXATION 


I ' 


way  in  a  few  commonwealths,  as  we  have  seen     But,  it  ;« 

vaiue  m  solving  the  vexed  question  of  local  tixAtinn      Tf  ^v. 
commonwealth   treasu^  should   be  supphll  Trough   otSe 

statrtafnt ':.'  '*1^  '"^''^''^''  '^  «^''*-te  incZe  tax  or  a 
state  tax  on  other  elements,  it  would  be  possil)le  not  ot.Iw„ 

tt:i^l  ff  *'*'"*'""  °'  '-^^^  estate.\^Tls;rtrrll5i  h 

?he  log£fpSw'th'"''"".°'  ''''.  '''''  ''"'T'-**'-  taxes 
iiie  logical  plan  for  the  immediate  future,  however  is  to  tnv 

corporations  on  their  receipts,  or  on  a  va luat^In  ia    o  Z 

Sprrrfr^v"f?'/T*^  ''"""«•'«'  ^"^  *°  *-  thZ  on  thei 
real  property  for  local  purposes,  with  the  understanding  that  in 

L?dle  suCe  "tT""!  T''"'-^*'""^  *•>'«  '-'^'  -Sate  tax 
un°t  rule     ri  ^^"f'^'/^f  ««ment  in  accordance  with  the 

unit  ru  e.  The  question  of  the  division  of  the  yield  of  th^ 
corporation  tax  may  safely  be  left  to  a  considerS  o  thp 
particular  needs  in  each  individual  case,  af^  the  p  nciJe  It 
first  been  apphed  to  the  other  state-wid^  taxes  ^ 

VIII.  Conclusion 

From  the  preceding  survey  it  appeare  that  the  United  Sfat^ 
are  slowly  advancing  to  a  more  rational  and  han^omous  system 
The  tendency  of  legislation  and  of  judicial  internretat  on^n  To' 
most  progressive  states  is  toward\he  LlSgS    which 
although  not  yet  completely  reahzed  in  all  its  features  i^Tn v 
one  state,  is  m  accord  with  sound  economic  prindpls  "" 

priciteSi^rr^  *"^  ^^p^-*^'^  ^^'  -^^-^--t 

J^  Corporations  should  be  taxed  locaUy  on  their  real  estate 

3.  Corporations  should  be  taxed  for  state  purooses  on  thB.V 
eammgs,  or  on  their  capital  and  loans  P^-^Poses  on  theu- 

asis  actLlT"''-  °^*°*^'  "^'T^  °'  •'^P't'^'  should  be  taxed 
as  IS  actually  received  or  employed  within  the  state     In  thp 

^urLf  te^r  Ste"  ^°'"^^^^^'  ^  ™"^-*  ^^  '^^^^  - 

5.  Where  capital  and  loans  are  taxed,  the  residence  of  thP 
shareholder  or  bondholder  should  be  immaterial  ' 

6.  There  should  be  no  distinction  between  domestic  and  for 
eign  corporations.    Each  should  be  ta^ed  for  its  bu  LTs  donl 
or  capital  employed  within  the  state.  ousmess  done 


THE  TAXATION  OF  CORPORATIONS 


315 


7.  If  corporations  are  taxed  on  their  property,  property  be- 
yond the  state  should  be  exempt. 

8.  If  corporations  are  taxed  on  their  capital  stock,  they  should 
not  be  taxed  again  on  their  property. 

9.  Where  the  corporate  stock  or  property  is  taxed,  the  share- 
holder should  be  exempt.  If  corporate  loans  are  taxed,  the 
bondholder  should  be  exempt. 

10.  Where  the  corporation  and  the  shareholder  or  bondholder 
are  residents  of  different  states,  the  tax  should  be  divided  be- 
tween the  states  by  interstate  agreements. 

11.  An  additional  tax  or  a  higher  rate  should  be  imposed  on 
corporations  which  have  through  natural,  legal  or  economic 
forces  become  monopolistic  enterprises. 


MODERN  PROBLEMS  IN  TAXATION 


317 


CHAPTER  IX 

MODERN   PROBLEMS   IN   TAXATION^ 

In  attempting  to  present  a  survey  of  the  modern  practical 
problems  in  taxation  we  are  naturally  confronted  by  the  diffi- 
culty that  the  actual  problems  assume  a  different  aspect  in 
various  countries,  an  aspect  largely  colored  by  fluctuating  po- 
litical, economic,  and  social  conditions.  Notwithstanding  this 
diversity,  however,  there  can  be  discerned  an  underlying  uni- 
formity in  the  modern  fiscal  development  of  civilized  nations, . 
and  it  will  be  our  endeavor  to  point  out  some  of  the  different 
phases  of  this  development. 

There  are  several  considerations  which  distinguish  the  modem 
science  of  finance  in  the  study  of  tax  problems.  These  are,  in 
order:  the  pursuit  of  justice,  the  emphasis  put  upon  modern 
economic  phenomena,  and  the  insistence  upon  conformity  with 
economic  principle.    Let  us  consider  each  of  these  m  turn. 

I.  Justice  and  the  new  Economic  Basis  of  Society 

The  first  point  is  well  sunmied  up  in  the  alleged  conflict  be- 
tween the  fiscal  and  the  social  principles  of  finance.  We  say 
alleged  conflict,  because  in  reality  there  is,  from  a  deeper  point 
of  view,  no  such  conflict  at  all.  It  is  sometimes  asserted  that 
the  fiscal  object  of  taxation  is  simply  to  secure  revenue,  while 
the  social  object  is  to  effect  some  desirable  change  in  social 
relations.  This  antithesis  rests  upon  a  failure  to  observe  that 
finance,  like  economics,  is  a  social  science,  and  that  even  from 
the  narrow  political  point  of  view  of  the  relation  between  the 
government  and  the  citizen,  the  government  cannot  derive  any 
revenue— that  is,  cannot  take  any  part  of  the  social  income— 
without  inevitably  affecting  social  relations.  The  fact  that  the 
government  has  in  mind  solely  the  fiscal  aim  of  securing  revenue 
does  not  alter  the  social  consequences  of  the  particular  revenue 

» This  chapter  first  appeared,  in  slightly  different  form,  and  under  the 
title  "Pending  Problems  in  Public  Finance,"  in  Proceedings  of  the  Congress 
of  Arts  and  Sciences,  Universal  Exposition,  St.  Louis,  1904,  vol.  vii. 

316 


system.  In  modern  times  social  conditions  are  influenced  to  a 
large  extent  by  changes  in  wealth.  Every  tax  necessarily  affects 
the  wealth  of  individuals,  and  if  we  could  in  all  cases  trace  the 
final  consequences  of  even  a  "purely  fiscal"  tax,  all  kinds  of 
unforeseen  results,  social  as  well  as  fiscal,  or  perhaps  better, 
social  because  fiscal,  would  disclose  themselves.  Economics  and 
finance  deal  not  with  intentions,  but  with  results.  The  function 
of  fiscal  science  is  to  point  out  to  the  legislator  the  necessary 
result^  of  his  actions. 

The  distinguishing  mark  of  modem  social  science  is  that  it 
endeavors  to  explain  not  only  what  is,  but  also  what  should  be. 
All  practical  action  is  thus  brought  to  the  crucible  of  justice, 
and  all  systems  of  taxation  are  put  to  the  test  of  conformity  with 
this  principle,  irrespective  of  the  intentions  of  the  legislature. 
The  great  problem, which  still  remains,  however,  is  to  elucidate 
the  exact  nature  of  this  economic  justice.  Every  one  agrees 
that  the  essential  ingredients  of  this  scheme  are  equahty,  or 
uniformity,  and  universality  of  taxation.  When,  however,  an 
attempt  is  made  to  interpret  them  and  to  outline  the  practical 
form  which  these  principles  should  take,  there  is  considerable 
disagreement,  because  the  actual  nature  of  the  principles  has 
not  been  thoroughly  analyzed.  It  betokens,  however,  a  step 
forward  in  all  practical  finance  that  a  more  or  less  conscious  effort 
is  everywhere  being  made  to  bring  the  tax  system  into  some  man- 
ner of  conformity  with  the  principle,  however  dim  its  outlines 
may  be. 

The  second  point,  which  differentiates  modem  taxation  from 
that  of  the  past,  is  the  emergence  of  the  new  economic  substra- 
tum of  society.  These  new  facts  of  fiscal  importance  may  be 
summed  up  under  the  following  heads: 

First,  the  increasing  economic  significance  of  the  laboring 
class,  with  the  corresponding  growth  in  the  importance  of  popu- 
lar consumption.  It  is  not  meant  by  this  to  imply  any  deprecia- 
tion of  the  role  played  by  capital.  On  the  contrary,  it  is  a  plati- 
tude to  say  that  this  is  pre-eminently  the  capitalistic  age.  What 
it  is  intended  to  emphasize  is  that  precisely  because  of  the  growth 
of  modern  economic  well-being,  the  great  mass  of  the  community, 
represented  by  the  laborers,  are  acquiring  an  increased  consum- 
ing capacity  and  that  their  demand  is  the  very  tap-root  of  mod- 
ern progress.  The  recognition  of  this  fact  has  brought  about 
vast  changes  in  modern  tax  systems. 


I  i 


318 


ESSAYS  IN   TAXATION 


. 


In  the  second  place  we  have  to  note  the  coming  to  the  fore 
of  the  corporation  as  the  typical  form  of  modern  business  enter- 
prise The  evolution  from  the  individual  to  the  early  partner- 
ship,  from  the  partnership  to  the  joint-stock  company,  from  the 
jomt-stock  company  to  the  corporation,  and  from  the  corpora- 
tion to  the  trust  is  one  of  the  most  instructive  lessons  in  institu- 
tional development.  Finance  has  not  to  study  it,  but  to  accept 
It.  lax  systems  framed  upon  the  assumptions  of  the  older 
conditions,  where  corporate  activity  was  the  exception  rather 
tnan  the  rule,  are  manifestly  inadequate  and  belated. 

The  third  change  consists  in  the  growing  importance  of  the 
problem  of  franchises.    This  is  not  the  same  as  the  corporate 
problem,  although  often  confused  with  it.     A  franchise  may 
assume  many  forms.     It  may  be  a  patent  or  copyright  in  the 
hands  of  an  individual;  it  may  be  the  privilege  of  inheriting 
property,  whether  that  privilege  be  granted  to  a  single  person 
or  a  group;  it  may  be  a  right  accorded  to  corporations  to  utilize 
opportunities  which  originally  belonged  to  the  community,  and 
which  are  for  sufficient  reasons  given  away.    Such  privileges  and 
franchises  have  indeed  existed  from  of  old,  but  the  complexity 
of  modern  society  and  the  immense  increase  of  public  wealth 
have  vastly  enhanced  both  their  extent  and  their  significance 
How  to  analyze  them,  how  to  measure  them,  and  how  to  fit  the 
result  mto  the  system  of  pubHc  revenue  is  becoming  one  of  the 
most  subtle  and  difficult  problems,  which  will,  no  doubt,  lone 
perplex  the  trained  student  as  well  as  the  legislator. 

The  fourth  change  is  the  economic  revolution  affecting  the 
distnbution  of  governmental  authority  as  between  the  general 
and  the  local  government.  The  cause  of  this  change,  as  is  well 
known,  is  not  only  the  forging  to  the  front  of  the  interests  of 
peace  rather  than  of  war,  but  above  all,  the  agglomeration  of 
modem  population  into  urban  centres.  With  the  segregation  of 
wealth  and  property  into  great  local  masses,  there  is  coming  the 
need  of  administering  to  the  wants  of  such  complex  aggregates 
Accordingly,  while  the  last  century  has  shown  a  great  increase 
of  national  expenditure  and  income,  there  has  been  a  far  larger 
growth  m  local  expenditures  and  incomes.  And  whereas  form- 
erly local  taxation  could  be  treated  as  a  relatively  unimportant 
appendage  to  national  taxation,  it  now  claims  a  distinct  and 
separate  place  of  its  own. 

Side  by  side,  however,  with  this  localization  of  wealth  there 
has  been  a  counter-movement  in  the  direction  of  the  nationaliza- 


MODERN  PROBLEMS  IN  TAXATION 


319 


tion  of  wealth,  in  the  sense  of  nationalization  in  the  opportunities 
of  securing  wealth.  The  economic  activities  of  to-day  have  far 
outgrown  the  swaddling-clothes  of  former  times.  Business 
enterprise  not  only  covers  the  whole  country,  but  encircles  the 
globe.  Citizenship  in  the  various  commonwealths  of  a  federal 
state,  like  Germany,  Australia,  Switzerland,  or  America,  has 
become  in  great  measure  meaningless  because  its  economic 
basis  has  been  so  effectively  weakened.  In  all  federal  states, 
therefore,  the  problem  of  taxation  is  complicated  by  the  diffi- 
culty of  correctly  apportioning  the  burdens  among  the  con- 
stituent commonwealths.  In  every  country,  federal  or  not,  a 
similar  difficulty  exists  as  between  the  local  government  and 
the  state  government.  Problems  of  double  taxation  resting 
upon  interstate  and  interlocal  complications  arise  to  confront 
us  at  every  turn. 

The  fifth  and  final  point  is  that  of  the  modern  social  solidarity. 
In  former  times  the  close  relation  subsisting  between  the  various 
branches  of  productive  enterprise  in  the  community  was  be- 
clouded by  the  predominant  social  and  political  influence  secured 
by  some  one  factor.  In  an  economy  based  upon  slavery  the 
only  importance  of  a  slave  is  that  of  a  working-tool;  in  an  econ- 
omy based  upon  the  predominance  of  the  large  landowner,  the 
function  of  the  moneyed  and  commercial  interests  is  apt  to  be 
overlooked.  In  the  early  stages  of  the  factory  system,  where  the 
mass  of  the  laborers  are  regarded  from  the  point  of  view  of 
production  rather  than  from  that  of  consumption,  it  is  natural 
that  the  socialistic  conception  of  class  conflict  should  emerge. 
A  more  careful  study,  however,  of  modern  industrial  society 
has  shown  that  while  indeed  there  is  no  such  thing  as  a  natural 
harmony  of  interest,  there  is  a  distinct  and  inevitable  influence, 
sometimes  for  good,  sometimes  for  evil,  exerted  by  each  factor 
of  production  upon  the  other,  and  by  each  social  class  upon  its 
neighbor.  Laborers  and  capitalists,  landowners  and  traders, 
factory  owners  and  financiers,  are  pursuing  their  own  interests, 
and  in  so  doing  they  necessarily  react  upon  the  interests  of  the 
others. 

The  distinguishing  mark  of  modern  economic  life  in  this  re- 
spect is  the  reaUzation  of  these  close  economic  interrelations. 
The  machinery  of  production  has  become  so  subtle  and  so  com- 
plex that  the  disarrangement  of  any  one  part  throws  the  whole 
out  of  gear.  The  overburdening  of  any  one  class  may  have  the 
most  unlooked-for  consequences  upon  another.    Taxation,  as  a 


:i0^ 


320 


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MODERN  PROBLEMS  IN  TAXATION 


321 


t|i 


weapon  of  retaliation,  often  proves  to  be  a  boomerang.  An  un- 
due pressure  on  a  railroad  may  decrease  facilities,  rather  than 
mcrease  revenue.  The  assessment  of  mortgages  may  hit  the 
farmer  rather  than  the  money-lender.  The  taxation  of  the 
laborer  may  limit  the  market,  rather  than  increase  the  profits  of 
the  capitalist.  Whether  we  desire  it  or  not,  modem  economic 
conditions  are  engendering  a  situation  where  every  one  is  in  a 
larger  sense  his  brother's  keeper  and  where  at  all  events  it  is  un- 
safe to  disregard  the  often  hidden  and  recondite,  but  none  the 
less  active,  influence  exerted  by  each  economic  class  upon  the 
others. 

All  these  changes  in  economic  life  have  affected  the  practical 
system  of  taxation  throughout  the  world.  They  have  created 
new  problems  for  the  scientific  student.  The  justification  of 
finance,  however,  as  a  science,  rests  upon  the  correlation  of  fiscal 
problems  with  economic  principle.  We  thus  come  to  the  next 
part  of  the  discussion,  the  influence  of  economic  analysis  on  fiscal 
facts. 

II.  Economic  Analysis  and  Fiscal  Facts 

The  first  result  of  economic  analysis  was  to  show  the  errors  of 
a  tax  system  resting  exclusively  or  in  great  part  upon  consump- 
tion. The  theory  of  consumption  as  the  test  of  faculty  or  ability 
to  pay  was  promulgated  in  the  later  middle  ages  by  reformers 
who  despaired  of  reaching  the  privileged  class  in  any  other  way. 
Every  man,  it  was  said,  must  consume,  and  the  more  idle  a  man 
IS,  the  more  luxuries  will  he  consume.  A  consumption  tax  thus 
seemed  to  be  the  sole  method  of  securing  universality  of  taxation. 
To  these  considerations  there  was  added  the  thought,  on  the 
part  of  some,  that  so  far  as  the  working-classes  were  concerned, 
taxes  on  the  necessities  of  life  would  be  admirable,  in  that  they 
would  compel  the  laborers  to  work  harder. 

In  opposition  to  this  view,  a  more  careful  economic  analysis 
disclosed  the  fact  that  a  tax  on  consumption,  regarded  as  a 
universal  system,  was  unwise  and  unjust— unwise  because  a 
tax  on  mere  luxuries  would  be  most  disappointing  in  the  yield- 
unjust  because  a  tax  on  necessities  would  fall  with  crushing 
severity  on  those  classes  which  could  least  afford  to  bear  the 
burden.  Above  all,  it  was  recognized  that  by  checking  con- 
sumption we  were  thereby  checking  production,  and  that  a 
general  tax  on  consumption  would  possess  most  of  the  dis- 
advantages of  a  tax  on  production  and  few  of  its  advantages. 


Consumption  taxes,  therefore,  as  a  sole  or  chief  reliance  of  the 
government,  have  been  fast  disappearing.  One  of  the  first 
acts  of  the  American  Government  in  Cuba  and  the  Philippines 
was  to  aboHsh  the  consumo  tax;  and  it  is  well  recognized  that 
the  continuance  of  the  municipal  octroi  in  France  and  Italy 
is  deplored  by  all  serious  students. 

The  next  triumph  of  economic  theory  was  to  disclose  the  dan- 
gers of  a  system  of  taxation  resting  on  production  and  exchange. 
In  one  sense  indeed  every  tax  that  is  not  a  tax  on  consump- 
tion may  be  regarded  as  a  tax  on  production,  for  all  wealth 
consists  either  of  producers'  goods  or  of  consumers'  goods. 
It  would,  therefore,  seem  to  be  impossible  to  avoid  the  imposi- 
tion of  taxes  on  production.  In  the  sense  in  which  the  term  has 
usually  been  employed,  however,  a  tax  on  production  has 
denoted  a  tax  imposed  directly,  and  at  a  late  stage,  on  the 
process  of  completing  the  finished  article.  Regarded  in  this 
light,  such  taxes  manifestly  impede  the  process  of  production 
and  are  to  be  deprecated  because  they  affect  the  able  and  the 
shiftless  producer  alike.  Taxes  on  production  often  put  a 
premium  on  inefficiency  and  are  apt  to  clog  the  wheel  of  in- 
dustrial progress.  The  tendency  of  modern  statesmanship  has 
accordingly  been  away  from  rehance  on  such  methods. 

Perhaps  the  greatest  change  in  fiscal  theory  during  the 
nineteenth  century  has  been,  thirdly,  to  analyze  and  to  explain 
the  need  of  taxing  shares  in  distribution  rather  than  consump- 
tion or  production.  We  have  learned  in  a  preceding  chapter 
how  the  principle  of  faculty  or  ability  to  pay  has  gradually 
worked  itself  through  the  conscience  of  the  public  and  the  theory 
of  the  publicist.  A  vast  amount  of  ingenuity  has  been  expended 
upon  the  attempt  to  disclose  the  real  meaning  of  faculty  as 
measured  by  the  property  or  the  income  of  the  individual. 
When  we  come  to  consider  the  facts,  however,  there  are  two 
striking  considerations  that  confront  us.  The  first  is  the  ex- 
ceedingly small  proportion  that  the  income  tax  bears  to  the 
total  revenue.  In  France,  for  instance,  there  is  as  yet  no  in- 
come tax  at  all,  and  even  in  England  and  Germany  the  pro- 
ceeds of  the  income  tax  are  insignificant  when  compared  to 
the  total  revenue,  state  or  local.  The  scientists  may  discuss 
and  do  discuss  the  problems  of  progression  and  differentiation 
of  taxation,  and  all  of  the  discussions  rest  on  the  assumption 
that  the  burdens  upon  the  individual  must  be  in  a  certain  pro- 
portion to  this  income;  yet  we  find  as  an  actual  fact  that  only 


322 


ESSAYS  IN  TAXATION 


MODERN  PROBLEMS  IN  TAXATION 


323 


a  very  inconspicuous  proportion  of  the  taxes  in  the  civilized 
countnes  of  to-d/iy  stand  in  any  direct  relation  to  the  income 
of  the  taxpayer. 

Not  alone  do  the  income  taxes  form  so  small  a  part  of  the 
whole,  but  furthermore,  in  many  countries  the  so-called  in- 
come taxes  are  really  not  taxes  on  the  personal  income  of  the 
mdividual.    In  England,  for  example,  it  is  well  known  the  so- 
called  income  tax  is  merely  a  collection  of  taxes  on  the  thing 
which  yields  the  income  rather  than  on  the  person  who  receives 
It.    That  is,  it  is  a  collection  of  taxes  on  produce  and  not  on 
mcome.    The  only  exception  is  the  famous  schedule  '' D,''  which 
is  notoriously  the  least  successful  of  all.     It  may  be  claimed 
mdeed  that  in  Prussia  the  income  tax  is  really  what  it  purports 
to  be,  but  all  who  have  made  a  study  of  the  system  know  that 
when  similar  methods  were  employed  in  England  at  the  begin- 
ning of  the  nineteenth  century,  they  proved  to  be  a  dismal 
failure.     The  English   administrators   consider  the  principle 
of  their  tax  far  superior  to  that  of  the  Prussian;  and  to  the  extent 
that  this  contention  is  justified,  the  superiority  rests  upon  the 
fact  that  the  tax  is  not  one  on  personal  income.  ^     Even  in 
Prussia  Itself,  the  home  of  efficient  bureaucracy,  the  tax  has 
been  by  no  means  free  from  objections.    The  same  repugnance 
to  the  personal  element  in  the  income  tax  which  is  found  in 
England  explains  why  it  has  been  impossible  as  yet  to  introduce 
the  system  into  France,  with  its  still  lively  recollection  of  the 
abuses  of  personal  taxation  under  the  ancien  regime,  and  ex- 
plains also  why  the  income  tax  has  been  so  slow  in  coming  in  the 
United  States. 

We  thus  find  the  remarkable  fact  that  while  the  science  of 
finance  has  been  elaborating  its  fundamental  principles,  it  has 
succeeded  in  some  respects,  but  has  failed  in  others  in  imprinting 
Its  conclusions  upon  legislation.  It  has  brought  the  actual 
taxes  on  consumption  and  production,  to  a  great  extent,  into 
line  with  its  conclusions,  but  it  has  spent  most  of  its  time  dur- 
ing the  mneteenth  century  in  working  out  the  principles  of  an 
mcome  taxation,  which  is  either  not  accepted  in  legislation,  or 
which,  if  accepted,  is  realized  to  so  small  an  ex-tent  and  in  such 
a  half-hearted  way  that  it  covers  at  best  only  a  fraction  of  the 
field  of  taxation. 

The  conclusion  is  hence  forced  upon  us  that  the  fiscal  analysis 

*  C/.  as  to  this  point  and  the  remainder  of  this  paragraph,  Selieman  TM 
Income  Tax,  1910,  passim.  '  " 


has  not  proceeded  sufficiently  far.  We  are  indeed  grateful  for 
what  has  been  accomplished,  but  we  have  evidently  not  yet 
reached  the  goal.  In  addition  to  the  theory  that  the  modern 
development  of  taxation  is  to  be  interpreted  in  the  light  of  the 
doctrine  of  individual  ability  or  faculty,  we  need  a  supple- 
mentary principle  to  help  us  thread  our  way  through  the  maze 
of  actual  fiscal  facts. 

This  principle  is  that  of  the  social  versus  the  individual 
basis  of  taxation.  The  conception  which  has  dominated  fiscal 
science  until  lately  is  the  individual  conception.  Direct  taxes 
have  in  theory  been  preferred  to  indirect  taxes,  because  they 
were  supposed  to  rest  where  they  were  imposed,  and  thus  to 
help  in  securing  justice  as  between  individuals.  The  goal  of 
all  taxation  was  the  attainment  of  a  method  in  harmony  with 
individual  faculty.  The  first  serious  breach  in  this  doctrine 
was  made  by  the  diffusion  theory  of  taxation.  The  diffusion 
theory  erred,  indeed,  in  that  it  went  too  far  in  attempting  to 
show  that  every  tax  is  always  and  inevitably  shifted  off  from 
the  shoulders  of  the  original  payer.  The  value  of  the  diffusion 
theory,  however,  consists  in  the  fact  that  it  put  the  problem 
in  the  right  way,  by  presenting  the  societary  aspects  of  taxation. 

Nevertheless,  the  diffusion  theory  made  the  situation  too 
simple.  It  has  quite  correctly  been  termed  superficial  and  one- 
sided. To  make  it  at  all  serviceable,  it  needs  to  be  supplemented 
by  another  theory,  which  I  have  taken  the  liberty  of  calling 
the  absorption  theory  of  taxation.^  The  absorption  theory 
rests  upon  the  doctrine  of  capitalization.  That  is  to  say,  where 
the  tax  is  not  shifted  from  the  seller  to  the  buyer  and  where  the 
economic  good  has  a  rental  value  as  well  as  a  capital  value,  the 
tax  which  remains  on  the  taxable  object  and  which,  therefore, 
to  that  extent  diminishes  the  income  to  be  derived  from  it,  i.e., 
its  rental  value,  must  also  proportionally  diminish  its  capital 
value.  The  selling  or  capital  value  of  anything  is  always  the 
capitalization  of  the  actual  and  prospective  rental  or  income 
value.  As  a  consequence,  through  this  familiar  principle  of 
capitalization  the  new  purchaser  of  the  commodity  will  buy  it  at 
the  reduced  price,  and  will  thus  virtually  buy  himself  free  from 
taxation.  Where  the  tax  cannot  be  shifted,  it  will  be  discounted, 
or  absorbed,  in  the  new  and  lower  price. 

A  new  tax  on  city  real  estate,  for  instance,  will  either  be 

1  Cf.  Seligman,  The  Shifting  and  Incidence  of  Taxationt  3d  ed.,  1910, 
pp.  221-226,  390-393. 


I 


\1 


324 


ESSAYS  IN   TAXATION 


diffused  by  increasing  the  rents  of  the  tenants,  or  it  will  be 
absorbed  in  the  sense  that  when  the  property  changes  hands 
the  new  purchaser  will  pay  a  price  reduced  by  the  capitaUzation 
of  the  tax.  So  a  new  tax  on  corporate  securities  will  either  be 
diffused  by  increasing  the  price  of  the  product  or  it  will  be  ab- 
sorbed in  the  new  and  lower  price  of  the  securities. 

The  combination  of  the  diffusion  and  the  absorption  theories 
of  taxation  explains  several  things.    It  explains  why  the  theoretic 
distinction  between  direct  and  indirect  taxes  based  upon  the 
alleged  facts  of  incidence  is  erroneous.     It  explains  why  in 
spite  of  this  theory  the  great  mass  of  revenue  to-day  continues 
to  be  raised  in  the  shape  of  indirect  taxes.    It  explains  why  in 
countries  like  the  United  States  the  state  and  local  taxes,  al- 
though still  in  principle  levied  on  persons,  are  slowly  coming 
to  be  imposed  on  things  rather  than  on  persons;  it  explains  why 
in  France  personal  taxes  have  been  impossible  since  the  Revolu- 
tion; it  explains  why  in  England,  with  the  exception  of  a  single 
schedule  of  a  single  tax,  the  whole  system  of  taxation  is  based 
on  things  and  not  on  persons;  it  explains  why,  even  in  Germany, 
where  the  personal  and  individual  elements  of  the  problem 
have  been  emphasized  in  theory,  the  personal  share  in  actual 
taxation  is  so  insignificant;  it  explains,  finally  why  the  legal 
decisions  on  taxation  in  the  United  States  are  coming  to  be 
in  harmony  with  the  truer  economic  doctrine  of  universality 
and  equality  of  taxation.    For  this  does  not  mean  that  every- 
body must  be  taxed  alike,  but  only  that  all  the  members  of  a 
given  class  must  be  taxed  alike,  while  there  may  be  the  greatest 
diversity  betwee!r  classes.     An  equal  tax  on  all  corporations 
does  not  imply  that  each  individual  stock-  or  bond-holder  who 
may  have  bought  after  the  tax  was  imposed  pays  equally,  just 
as  little  as  an  equal  tax  upon  real  estate  implies  that  each  in- 
dividual land-  or  house-owner  everywhere  and  necessarily  bears 
the  burden  of  the  tax. 

In  short,  the  individual  point  of  view  in  taxation,  which 
assumes  that  justice  can  be  done  by  assessing  each  individual 
directly  and  in  first  instance,  rests  upon  an  analysis  which  does 
not  comprehend  all  the  elements  in  the  problem.  The  social 
point  of  view  is  that  of  modern  economics,  which  seeks  to  trace 
the  workings  of  general  economic  law  and  to  study  the  forces 
which  affect  the  distribution  of  the  social  income.  The  individ- 
ual point  of  view  while  good  as  far  as  it  goes,  is  not  only  in- 
adequate in  itself,  but  fails  to  explain  all  the  developments  of 


MODERN  PROBLEMS  IN  TAXATION 


325 


modern  taxation.  It  must  be  supplemented  by  the  social 
point  of  view,  resting  upon  a  combination  of  the  absorption 
and  diffusion  theories,  and  which  is  in  harmony  with  those 
facts  of  fiscal  life  that  are  difficult  to  explain  on  any  other  inter- 
pretation. It  is  safe  to  predict  that  when  once  this  is  accepted, 
the  most  fruitful  work  of  the  future  in  the  science  of  finance 
will  consist  in  the  elaboration  in  detail  of  the  conditions  and 
the  limits  of  the  absorption  and  diffusion  theories. 

III.  The  Practical  Problems 

Regarded  from  this  point  of  view,  a  new  light  is  thrown  on 
the  practical  problems  throughout  the  world.  The  most  im- 
portant of  these  pressing  problems  are  as  follows:  First,  the 
reform  of  so-called  indirect  taxation.  The  social  consequences 
of  indirect  taxation  are  now  recognized  to  an  ever-increasing 
extent.  So  far  as  taxes  on  consumption  are  concerned,  it  is 
fairly  well  appreciated  that  the  commodity  taxed  must  possess 
the  mingled  qualities  of  a  necessity  and  a  luxury;  if  it  possess 
only  the  characteristics  of  a  luxury  the  revenue  will  be  insignif- 
icant; if  it  possess  only  the  qualities  of  a  necessity,  it  will  fall 
with  undue  severity  on  the  modest  consumer.  If,  however,  it 
combines  both  characteristics,  namely,  that  of  wide  use  and  at 
the  same  time  that  of  a  certain  degree  of  dispensability,  the 
revenue  is  apt  to  be  large  and  elastic  and  the  burden  not  too 
severe.  The  number  of  consumable  commodities  that  unite 
both  these  characteristics  is  small,  and  hence  we  find  everywhere 
throughout  the  civilized  world  the  tendency,  to  restrict  taxes 
on  consumption  to  very  few,  but  very  lucrative,  articles. 

In  the  second  place  we  find  well-nigh  everywhere  the  aban- 
donment of  the  old  general  property  tax  regarded  as  a  personal 
impost.^  In  England  and  Germany  it  disappeared  during  the 
eighteenth  century;  in  France  it  was  abolished  by  the  Revolu- 
tion; in  America,  where  the  economic  conditions  brought  it 
into  life  during  the  eighteenth  century  and  the  early  part  of  the 
nineteenth,  it  is  beginning  to  break  up  in  those  sections  where  the 
agricultural  economy  is  giving  way  to  a  commercial  and  in- 
dustrial economy. 

Thirdly,  we  notice  everywhere  the  replacing  of  the  general 
property  tax  by  taxes  on  the  thing  rather  than  on  the  person. 
In  other  words,  personal  taxation  is  giving  way  to  impersonal 

*  Cf.  for  details  chapter  ii,  supra. 


i 


326 


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MODERN  PROBLEMS  IN  TAXATION 


327 


taxation.  In  the  local  tax  on  real  estate  this  process  has  been 
carried  almost  to  completion.  In  Europe,  for  instance,  the 
taxes  levied  on  the  land  and  on  the  house  are  assessed  irrespec- 
tive of  the  owner  or  of  the  relations  that  may  be  entered  into 
between  owner  and  tenant.  Everywhere  in  Europe  the  tax 
IS  a  tax  on  the  produce  of  the  land  or  house—that  is,  upon 
what  It  yields  in  the  shape  of  rent  or  of  profits  equivalent  to 
rent.  In  some  countries,  as  in  England,  the  tax  is  not  paid  by  the 
owner  at  all,  but  by  the  occupier.  Even  in  the  United  States 
the  tax  is  beginning  to  be  assessed  on  the  parcel  of  real  estate 
and  not  on  the  individual  who  owns  it.  Whether  the  owner 
or  some  one  else  pays  the  tax  is  immaterial,  and  if  the  tax  is 
not  paid,  no  regard  is  paid  to  the  owner  and  the  land  itself 
is  sold.  We  could  get  scarcely  further  away  from  the  old  idea 
of  individual  taxation.  The  tax  is  a  tax  on  the  thing  and  not 
on  the  person. 

In  New  York,  for  instance,  the  older  method  like  that  in  all 

the  commonwealths,  had  been  to  make  the  owner  of  the  land 

personally  responsible  for  the  tax  on  real  estate,  just  as  in  the 

case  of  personal  property.    If  he  failed  to  pay,  the  remedy  was 

distress  on  the  individual  and,  in  case  of  failure  to  find  suflftcient 

chattels  for  the  levy,  arrest.     This  system  broke  down  at  an 

early  period  so  far  as  non-resident  owners  were  concerned,  and 

in  such  cases  the  tax  was  made  a  lien  on  the  land  itself,  with 

power  to  sell  the  land  in  case  the  tax  was  not  paid.i    It  was  not 

until  1850  that  the  system  of  taxing  non-resident  lands  was 

apphed  in  the  city  of  New  York  to  the  lands  of  residents  also 

But  even  then  it  was  for  a  long  time  the  exception  rather  than 

the  rule,  and  the  courts  were  slow  to  recognize  the  nature  of 

the  change.2    But  what  was  originally  the  exception  became 

before  long  the  rule,  until  at  the  beginning  of  the  twentieth 

^  In  Massachusetts  this  power  firat  appears  in  1731.    See  the  history  of 
the  legislation  in  that  State  in  Richardson  vs.  Boston,  148  Mass   508 

.f  M  '"  v"1  ^^^  l^  *xf  ""^^  ""^  ^^^^^  ^'-  ^^^  Mayor,  etc.,  of  the  City 
of  New  York,  99  N.  Y.  280,  the  court  held  that  "the  o^ly  effect  of 
omitting  to  insert  the  name  of  the  owner  is  to  deprive  the  City  of  the  right 
to  collect  the  tax  from  the  owner  personally  or  by  distress  of  goods  and 
chattels,  etc  and  to  confine  its  remedy  for  the  collection  of  the  tax  to  the 
enforcement  of  its  hen  therefor  on  the  land  assessed."    But  on  the  other 

.Z  '?i  it  •  ^^  ""^  ^^^^^^  ""•  ^^"'  ^^  Appellate  Division,  p.  585,  the  court 
said.  btiU  m  my  opinion  this  has  not  changed  the  effect  of  the  proceed- 
ing.   It  is  essentially  a  proceeding  to  create  a  debt  against  an  individual. 

Irl'^r'";!?"?  V^^  ?"T^7  ^^^^^  ^^^  ^^^  ^^  ^  only  in  the  nature  of 
surety  hable  for  his  default." 


century  the  assessment  of  all  real  estate  in  New  York  city  was 
made  by  lot  and  block.  It  had  become  in  other  words,  a  geo- 
graphical or  topographical  assessment,  instead  of  an  assess- 
ment to  the  owner  or  person.  This  method  spread  to  a  few 
other  cities  in  the  states.  The  State  Board  of  Tax  Commission- 
ers in  various  successive  reports  recommended  a  change  in  the 
general  state  law,  whereby  the  distinction  between  resident 
and  non-resident  assessments  should  be  abandoned,  and  all 
real  estate  assessments  should  be  in  rem,  i.e.,  against  the  land 
itself.  This  was  officially  accomplished  in  1911  when  it  was 
provided  by  law  that  throughout  the  state  of  New  York  the 
name  of  the  owner  of  the  real  estate  should  no  longer  be  essential 
to  the  validity  of  the  assessment,  provided  that  the  property 
were  described  in  sufficient  detail  to  identify  it.  Of  the  inci- 
dental possibiUties  of  improvements  which  this  law  may  bring 
about  in  the  assessment  of  the  real  estate  tax  this  is  not  the 
place  to  speak. 

In  the  other  so-called  direct  taxes,  a  similar  development  is 
to  be  observed.  The  business  taxes  in  Europe  are  levied  upon 
the  business  as  such  and  not  upon  the  owner  of  the  business. 
The  inheritance  tax  is  in  many  countries  levied  upon  the  in- 
heritance and  not  upon  the  individual  who  receives  the  in- 
heritance. The  general  land  tax  in  England — the  last  vestige 
of  the  mediaeval  general  property  tax  upon  individuals — has 
actually  become  a  redeemable  rent-charge.  Even  the  income  tax, 
which  in  theory  is  assuredly  personal,  has,  as  we  have  already 
stated,  in  some  places  at  least  almost  completely  lost  its  individ- 
ual character  and  has  become  in  great  measure  a  tax  upon  the 
thing  affording  the  income  rather  than  upon  the  person  receiving 
the  income.  In  the  United  States  the  so-called  personal  tax, 
that  is,  the  tax  on  individuals  according  to  their  personal  prop- 
erty, is  fast  becoming  a  farce  in  all  the  older  centres.  The 
problem  is  really  a  deeper  one  than  the  German  scientists  have 
usually  recognized.  It  is  not  so  much  a  conflict  between  a  tax 
upon  produce  and  a  tax  upon  income  as  it  is  a  conflict  between 
the  social  and  the  individual  bases  of  taxation.^ 

*  In  two  recent  articles  in  SchmoUer's  Jahrbuch  fur  Gesetzgehung,  Ver- 
waliung  und  Volksivirthschaft,  Professor  Gustav  Cohn,  of  Gottingen,  crit- 
icizes this  position.  In  his  article  on  "Charakterzuge  des  Amerikani- 
Bchen  Steuerwesens,"  in  vol.  xxiii.  (1908),  p.  431  et  seq.,  he  contends  that 
the  only  reason  why  the  United  States  is  not  more  quickly  adopting  the 
principle  of  faculty  or  ability  to  pay  is  that  conditions  are  so  unripe  here. 
He  has  no  faith  in  any  attempt  to  explain  matters  by  a  new  principle.    In 


328 


ESSAYS  IN  TAXATION 


MODERN  PROBLEMS  IN  TAXATION 


329 


i  . 


« 

In  the  fourth  place,  we  find  everywhere  an  increasing  impor- 
tance attached  to  corporations  as  the  source  of  revenue  In 
l!|Urope  this  process  is  somewhat  concealed  because  of  the  in- 
clusion of  the  revenue  from  corporations  in  the  income  tax, 
just  as  m  many  of  the  younger  American  commonwealths  the 
revenues  figure  in  the  general  property  tax.  In  the  older  states 
corporation  taxes  are  put  into  a  separate  category,  and  in 
some  states,  as  in  New  York,  they  are  even  called  indirect 

J^ITt"*  "^'"'^  T'^"*'  ^ '"},  substance  a  leading  review  of  my  book  on  The 
Income  Tax,  m  vol.  x.xxv.  (1911)  of  the  same  journal,  entitled  "Die  Ein- 
kommensteuer  m  den  Veremigten  Staaten  von  Amerika,"  Professor  Cohn 
welcomes  what  he  calls  my  reversion  to  the  principle  of  facultvTut  Urits 
me  with  abandoning  my  former  position.  ^' 

The  problem,  however,  is  not  one  of  inconsistency  at  all  nor  m  it   as 

Sftl^,^-     T"°,K  J°  ^T""  ''■'"'  '^  ''^quainted  with  American  con- 

—tibl^n''  fi  ""I  i""  ,''''""'">■  "PP"^  tendencies  arc  at  present 
perceptible  m  our  fiscal  development.  On  the  one  hand  we  find  the  tend- 
ency toward  the  adoption  of  the  principle  of  individual  faculty  or  ability 
m  taxation,  typified  primarily  in  our  federal  finance  by  the  tariff-reform 

^our  »tT,'°tH''''r^""'''"';  °°  *•'''  °*«^  ^^'"^-  ""='*  i«  the  tendency 
m  our  states  and  cities  away  from  personal  taxation  in  the  sh.ipe  of  the 

fhe^ir'^'^'L^f  r'*  *.""■"'*  ">"  "''"P"""  "°t  only  of  indirect  taxes  in 
ihe^der  sense  but  also  of  impersonal  "real  taxes,"  i.  e.  taxes  on  things. 

«  ,^.K       ?>r*"?f  %"«  f^ally  not  opposite,  but  complementary;  just 

Tl  Tr.^^  ^  ^"^  u?  °^'"'^'  """"'"'^  ""  ""t'""  the  simultaneous  action 
^Ln     Wh^'T  ™'^'°8/°'^  centralization,  others  making  for  decentraliza- 

tZ^  ^     n  ".l^T"*  ^•"=    '°'^'^'  *'"*^"  of  ta.xation  in  1904  I  had  in 

Trinl^T-  ^,n'',n^r''f  "".P"'^''^'"  "'  ^**'«  ^<^  '"c^'  taxation;  when  I 
emphasized  m  1910  the  faculty  theory  of  taxation  I  was  discussing  pri- 

Cnhl^i^t  nationa^  problem.  There  is  nothing  inconsistent,  as  Professor 
^„hL  k7  '  fu  *';'^  *"°  standpoints.  In  other  countries  at  present, 
and  possibly  m  the  America  of  the  f utm^,  the  problem  may  not  be  that  o 

na  !nLl  T""  '*"*"  °u  '"'"'  *'^*'°°'  ^°'  the'  intcrrelatioL  of  C  and 

thi  Unl^^!w  "^T^.T."'  '^t""''!"'"'  "•>''*  *«y  '^  "t  present  in 
the  Umted  States.  That  the  problem,  however,  is  everywhere  one  of  the 
social  ,^«^  the  mdividual  point  of  view,  and  that  the  te^ency  toward  the 
anX°nh°^  the  prmciple  of  individual  faculty  is  inadequate  to  e^ll 
all  the  phas^  of  the  modem  movement  wiU,  I  fancy,  not  be  disputed  bv 

vS rf  elT'r"  ^""^'^  °^  f^'^'"' '"'''  -^^^t  not  to  be  eTude  the 
^^Z,?.f  ?o?n  the  ^^"^  themselves,  especially  since  their  federal  tax 

2tZ  il .  ?■  ^^^  '^  *""i"*  "'">  ^^^  ^""^"^  "-riters  on  public  finance 
cenT^^K  ^  ff  f?t>on,  so  far  as  this  point  is  concerned,  is  that  they  have 

Tr^^J^r  ?i  f""""  '^'"^'T^'y  °°  the  movement  to  replace  for  state 
fn  r  '  I  7  ^  If"^  °"  .P"^""*  ^y  the  new  income  and  inheritance  taxes, 
movlpnf  f     simultaneous  and  in  some  respects  equally  important 

Td  Z!?  fiJ"^  °Zu^?  ?T"^^'  °f  individual  faculty  in  national,  state 
U°on  oftth"L"n^denc^^'  '  '"^^  """**  ^ '' ^  ^  ""-"P*  ^  ^P'-- 


taxes  in  contradistinction  to  the  direct  or  property  taxes. 
Everywhere,  however,  they  form  a  problem  of  increasing  im- 
portance and  present  an  admirable  example  of  what  is  meant 
by  taxation  from  a  social  rather  than  from  an  individual  point 
of  view.  Taxation  of  the  corporation  does  not  necessarily 
mean  taxation  of  the  security-holder  who  has  purchased  the 
stock  or  bond  from  the  original  holder.^ 

The  main  outlines  of  the  development  of  the  immediate 
future,  throughout  the  world,  are  thus  fairly  clear.  Each 
country  will  continue  to  have  its  particular  problems  based 
upon  its  special  economic  and  political  needs.  Everywhere 
there  will  continue  to  be  an  attempt  to  realize  the  principle 
of  fiscal  justice,  interpreting  it,  however,  more  and  more  from 
the  point  of  view  of  social  interrelations  rather  than  from  that 
of  individual  conditions.  The  statesmen  and  scientists  alike 
will  find  the  great  difficulty  of  the  future  to  consist  in  attaining 
this  due  proportion  between  the  undoubted  needs  of  the  in- 
dividual and  the  consequences  of  his  participation  in  the  social 
group.  For  we  must  not  forget  that  while  it  is  necessary  to 
regard  the  ultimate  results  of  all  fiscal  policies,  the  immediate 
results  are  often  of  primary  practical  importance.  The  conflict 
between  immediate  and  ultimate  results  is  another  way  of  put- 
ting the  contrast  between  the  individual  and  social  aspects  of 
finance.  To  realize  the  truth  contained  in  the  latter,  without 
disregarding  the  legitimate  importance  of  the  former,  is  the 
problem  reserved  for  the  coming  decades. 

*  C/.  sitpm,  p.  309. 


f 


I 


CHAPTER  X 

A   QUARTEK   CENTURY's   PROGRESS   IN   TAXATION* 

I.  General  Progress 

The  subject  of  this  chapter  is  susceptible  of  a  double  treat- 
ment. It  covers  not  only  the  actual  changes  of  a  fundamental 
nature  in  the  practice  of  taxation,  but  also  the  development 
that  has  taken  place  in  the  governing  principles.  These, 
however,  are,  after  all,  two  phases  of  the  same  movement, 
for  the  influence  of  practice  and  theory  is  reciprocal.  On  the 
one  hand,  the  theories  themselves  represent  an  outcome  of 
the  facts,  for  fiscal  theory,  like  all  social  theory,  is  but  an 
attempt  to  present  an  analysis  of  the  living  forces  at  work  in 
industrial  society.  And  on  the  other  hand,  so  far  as  fiscal 
theory  deals  with  what  ought  to  be,  rather  than  with  what  is, 
It  justifies  itself  only  to  the  extent  that  its  conclusions  are 
approved  by  the  popular  mind,  and  thus  become  incorporated 
in  the  actual  bone  and  sinew  of  the  social  organism.  Fiscal 
theory  and  fiscal  practice  are  the  obverse  and  reverse  of  the 
same  medal. 

In  the  second  place,  the  problem  is  not  only  specific  but 
general.  As  citizens  and  patriots  we  are  naturally  most  inter- 
ested in  the  problems  of  our  own  country;  but  as  scientists, 
our  horizon  is  a  wider  one.  Science  cannot  be  fettered  by 
bonds  of  national  forging.  It  soars  far  above  such  limits. 
This  is  especially  true  of  the  scientific  problems  of  taxation. 
It  goes,  of  course,  without  saying  that  the  fiscal  institutions 
of  every  country,  as  all  its  economic  and  social  institutions, 
are  colored  by  the  particular  environment.  It  would  there- 
fore be  hopeless  to  attempt  to  reproduce  in  any  one  country, 
in  all  its  minute  details,  the  institutions  of  another  country. 
But  while  we  may  concede  the  diversity  of  conditions,  and 
the  peculiarities  of  national  life  which  must  guide  the  states- 

1  This  chapter  is  in  substance  a  reproduction  of  the  address  dehvered  at 
the  Twenty-fifth  anniversary  meeting  of  the  American  Economic  Associa- 
tion m  1908,  and  published  in  the  Proceedings  for  that  year. 

330 


A  QUARTER  CENTURY'S  PROGRESS  IN  TAXATION    331 

man  in  elaborating  any  specific  plan,  it  is  equally  true  that 
there  are  discernible  certain  broad  and  general  tendencies 
which  are  common  to  the  life  of  all  modern  progressive  soci- 
eties, and  which  constitute  the  special  field  of  the  scientific 
observer.  We  shall  see  indeed  that  however  much  individual 
countries  may  differ  from  each  other,  and  however  confused 
the  actual  scheme  at  first  blush  may  appear,  there  is,  as  it 
were,  a  silken  strand  which  runs  through  the  tangled  skein, 
and  which  serves  to  give  unity  to  what  seems  disorder. 

And  finally,  we  are  struck,  in  this  introductory  survey  of 
a  quarter  century's  progress,  by  the  fact  that  the  science  of 
finance  is  only  slowly  coming  to  its  own,  as  compared  with 
the  almost  revolutionary  development  in  the  general  theory 
of  pure  and  applied  economics.  This  is  due  to  the  fact  that 
the  really  diflficult  fiscal  problems  are  of  recent  origin,  and 
that  fiscal  science  rarely  grapples  with  problems  until  they 
have  became  acute.  In  Germany  and  in  Italy  the  difficulties 
arose  at  a  slightly  earlier  period;  and  we  hence  find  a  consider- 
able scientific  activity,  along  several  lines  at  least,  at  the  be- 
ginning of  the  period  under  discussion.  In  other  countries, 
and  notably  in  England,  France,  and  the  United  States,  the 
problems  have  been  of  much  later  growth,  and  it  is  accord- 
ingly only  in  the  last  few  years  that  we  find  increasing  atten- 
tion paid  to  the  underlying  principles  of  tax  adjustment. 
Even  in  Germany  and  Italy  the  rapid  changes  of  industrial 
environment  have,  in  many  respects,  shifted  the  centre  of 
gravity,  and  have  recently  engendered  newer  problems  which 
are  common  to  the  whole  civilized  world.  It  is,  however, 
not  only  in  Germany  as  in  France,  in  England  as  in  Japan, 
that  the  fiscal  problem  is  at  the  present  time  in  the  very  fore- 
front of  political  and  social  discussion.  Especially  in  the 
United  States  it  is  a  phenomenon  of  the  most  cheering  import 
to  note  how  the  younger  scholars  are  now  beginning  to  address 
themselves  to  a  consideration  of  these  vexing  problems.  The 
progress  that  has  been  accomplished  in  the  last  quarter  of  a 
century  is  an  earnest  of  the  far  greater  development  that  is 
imminent  in  the  immediate  future. 

Before  taking  up  the  question  of  fiscal  theory,  however, 
one  fact  must  be  noted  as  of  paramount  importance.  It  is 
the  increasing  significance  everywhere  being  attached  to  ad- 
ministrative considerations.  What  is  true  more  or  less  of  all 
economic  institutions  is  particularly  appficable  to  our  special 


332 


ESSAYS  IN  TAXATION 


I 


problems.    On  all  sides  we  are  realizing  the  fact  that  the  ques- 
tion of  efficiency  is  scarcely,  if  at  all,  subordinate  to  the  ques- 
tion of  justice.    Or,  let  me  put  it  rather  in  this  way:  that 
however  well  justified,  and  however  thoroughly  calculated  to 
promote  the  ends  of  justice  a  given  scheme  may  be,  unless  its 
administrative  features  are  so  arranged  as  to  make  it  workable, 
the  beneficent  aims  are  bound  to  be  frustrated;  and  a  half-way 
good  measure  which  is  administratively  unobjectionable  fre- 
quently turns  out  to  be  far  superior  to  an  ideal  scheme  which 
ultimately  discloses  serious  faults  in  its  administrative  aspects. 
It  is  for  this  reason  that  we  notice  so  much  attention  paid 
throughout  the  world  in  recent  years  to  the  administrative 
machinery,  or  to  the  purely  mechanical  aspects  of  the  problem. 
In  both  England  and  Germany,  for  instance,  the  past  quarter 
of  a  century  has  seen  a  marked  improvement  in  the  adminis- 
trative processes  of  the  income  tax,  and  especially  in  the  former 
country  has  rendered  palatable  a  system  which  was  originally 
viewed   with   misgiving   and   distrust.     Those   authors— and 
they  are  not  yet  entirely  extinct— who  endeavor  to  draw  a 
warning  lesson  from  the  income  tax,  derived  from  the  speeches 
of  Gladstone  and  the  writings  of  an  earlier  generation  of  econ- 
omists, are  not  alone  blind  to  the  teachings  of  the  more  recent 
movements  of  theory,  of  which  we  shall  speak  in  a  moment, 
but  are,  above  all,  deaf  to  the  lessons  of  administrative  develop- 
ment.    Even  in  the  United  States,  where  great  and  funda- 
mental changes  in  the  structure  of  taxation  are  impending, 
it  is  coming  more  and  more  to  be  realized  that  even  our  present 
system,  inadequate  and  unsatisfactory  though  it  be,  is  sus- 
ceptible of  a  prodigious  improvement  on  purely  administra- 
tive lines.    We  have  but  to  call  attention  to  the  remarkable 
progress  that  has  been  achieved  in  the  administration  of  the 
tax  on  real  estate  in  the  city  of  New  York,  under  the  skillful 
supervision  of  the  capable  head  of  the  Commissioners  of  Taxes 
and  Assessments.     Another  more  or  less  familiar  example  is 
the  excellent  work  that  has  been  done  in  the  state  control  of 
local  officials,  or  the  centralized  administration  of  the  general 
property  tax,  in  commonwealths  like  Minnesota  and  Wisconsin, 
where  the  political  powers  have  seen  fit  to  call  to  their  aid 
scientifically  trained  fiscal  administrators.     In  fact,  if  there 
is  any  one  thing  which  looms  large  in  the  history  of  the  last 
twenty-five  years  in  the  United  States,  it  is  the  increasing 
significance  that  is  now  slowly  being  attached  to  the  problem 


A  QUARTER  CENTURY'S  PROGRESS  IN  TAXATION    333 

of  administrative  efficiency.  In  this  alone  lies  no  small  measure 
of  our  hope  for  the  future.  The  administrative  problem  lies, 
however,  beyond  the  confines  of  this  discussion. 

II.  Local  Considerations  and  the  Benefit  Theory 

Assuming,  then,  that  the  problem  of  administrative  efficiency 
is  being  successfully  attacked,  we  must  now  address  ourselves 
to  those  underlying  principles  which,  after  all,  form  the  touch- 
stone of  ultimate  fiscal  success.  If  we  take  a  broad  survey  of 
the  theory  and  practice  of  the  last  twenty-five  years'  taxation, 
we  shall  be  impressed  by  two  fundamental  reflections.  The 
first  is  the  emphasis  that  is  being  placed  upon  social  rather  than 
individual  considerations;  and  the  second  is  that  even  in  so 
far  as  this  is  not  true  there  has  been  a  decided  change  in  our 
attitude  to  the  individual  norm  in  taxation.  Let  us  consider 
these  separately. 

The  first  point  is  one  which  I  have  repeatedly  accentuated 
in  the  last  few  years,  and  which,  therefore,  will  call  for  less 
elaboration  in  this  place.  Whatever  theory  the  older  writers 
on  taxation  might  have  advanced  as  to  the  obligation  of  the 
individual  to  contribute  to  the  support  of  government,  they 
always  tacitly  assumed  that  the  so-called  direct  taxes  rested 
upon  the  taxpayer;  and  in  this  scheme  of  equitable  taxation  there 
was  manifestly  no  room  for  a  system  of  indirect  imposts.  One 
of  the  most  striking  facts  in  the  literature  of  taxation  is  that  we 
search  in  vain  for  an  adequate  explanation,  not  to  speak  of  jus- 
tification, of  a  set  of  revenues  which  in  almost  every  country 
forms  the  considerably  greater  part  of  the  whole.  To  say,  as 
did  a  well-known  writer  some  years  ago,  that  all  indirect  taxa- 
tion is  crooked  taxation — importing  into  the  term  a  moral  as 
well  as  a  physical  connotation — is  seriously  to  impeach  the 
entire  modern  development.  It  is  indeed  true  that  the  civilized 
world  has  abandoned  the  mediaeval  system  of  a  multiplicity  of 
indefensible  and  burdensome  indirect  taxes.  But  it  is  also 
true  that  their  place  has  been  taken  by  taxes  which  are  less 
burdensome  and  more  defensible  indeed,  but  none  the  less 
equally  indirect  taxes.  One  has  but  to  run  through  the  budgets 
of  any  modern  nation,  in  order  to  realize  what  a  very  consider- 
able share  of  the  revenue  is  derived  from  so-called  indirect 
sources;  and  in  many  cases  the  proportion  is  becoming  greater, 
instead  of  less.    Even  in  the  United  States,  where  the  import 


334 


ESSAYS  IN  TAXATION 


>  1' 


duties  and  the  internal  revenue  taxes  form  the  almost  exclusive 
source  of  national  income,  the  trend  toward  indirect  taxes  even 
m  the  commonwealths  is  typified  by  the  stock-exchange  tax 
as  m  New  York  and  the  mortgage  tax,  which  now  constitutes 
m  some  states  an  important  source  of  commonwealth  revenue. 
And  if  we  look  at  the  admirable  scheme  by  which  Japan  has 
been  able  to  arrange  her  war  and  her  post  helium  finances,  we 
are  equally  struck  by  this  preponderance  of  the  so-called  in- 
direct taxes.  Of  the  situation  as  it  exists  in  France,  in  Italy, 
m  Germany,  and  in  England,  we  need  not  speak  at  all. 

A  theory  of  taxation  which  is  competent  to  explain  the 
modem  development  must,  therefore,  put  us  in  the  way  of 
comprehending  the  real  principle  underlying  the  indirect 
taxes.  But  it  must  do  more  than  that.  It  must  also  put  us  in 
a  position  to  understand  the  break-up  of  the  general  property 
tax  and  the  change  taking  place  in  the  taxation  of  mortgages 
throughout  the  country.  Or  again,  it  must  enable  us  to  ex- 
plain how  It  is  that  in  the  great  city  of  New  York  almost  the 
entire  tax  revenue  can  be  derived  from  an  impost  on  real  estate, 
without  engendering  a  revolution  among  the  particular  class 
of  property  owners  that  is  singled  out  for  taxation. 

The  truth  of  the  matter  is  that  things  are  not  what  they 
seem;  that  the  older  theory  that  justice  can  be  attained  by 
taxing  every  man  on  all  his  property  does  somehow  not  work 
out,  because,  as  a  matter  of  fact,  the  taxation  of  property  is 
not  necessarily  taxation  of  the  property  owner.     In  other 
words,  we  are  confronted  by  the  great  problem  of  the  shifting, 
the  incidence,  and  the  effects  of  taxation.     The  individual 
taxpayer  does  not  live  to  himself  alone;  he  forms  a  part  of  a 
dehcate  and  complex  organism,  and  his  interests  are  indissolubly 
bound  up  with  those  of  his  neighbors.    The  problem  of  taxation, 
like  every  problem  of  value,  is  primarily  a  social  and  not  an  in- 
dividual problem.     The  striking  change  that  has  come  over 
modem  economics  is  the  emphasis  that  has  been  put  upon  the 
social  aspects  of  theory.    If  there  is  any  one  thing  that  is  needed 
in  the  science  of  finance,  it  is  the  point  for  which  I  have  clamored 
so  insistently  during  the  past  few  years,  that  the  newer  theory 
of  taxation  must  proceed  from  the  social,  and  not  the  individual, 
point  of  view.    It  is  this  point  of  view  that  is  responsible  for  the 
more  modern  version  of  the  theory  of  diffusion  or  absorption 
of  taxation.    It  is  this  point  of  view  which  emphasizes  the  newer 
doctrine  of  capitalization  of  taxation.    It  is  this  point  of  view 


A  QUARTER  CENTURY'S  PROGRESS  IN  TAXATION    335 

which  unites  the  doctrines  of  absorption  and  capitalization 
in  the  wider  theory  that  I  have  ventured  to  call  the  elision  of 
taxation.  Slowly  we  are  beginning  to  realize — and  by  we  I 
mean  not  alone  the  representatives  of  science,  but  the  legis- 
lators and  the  courts — that  to  tax  a  particular  piece  of  property 
is  not  necessarily  to  tax  the  property  owner;  that  to  attain 
justice  in  taxation  it  is  not  requisite  to  tax  all  kinds  of  property; 
and  that  in  the  case  both  of  the  so-called  direct,  and  the  so- 
called  indirect  taxes,  the  real  problem  is  not  as  to  which  individ- 
ual advances  the  tax,  but  as  to  what  class  of  individuals  ulti- 
mately pay  the  tax,  or  are  either  burdened  or  benefited  by  it. 

In  this  respect,  therefore,  the  progress  of  theory  in  the  last 
twenty-five  years  has  scarcely  kept  pace  with  the  unconscious 
revelation  of  the  theory  in  the  facts  of  actual  life.  A  beginning 
has  been  made,  but  only  a  beginning;  and  the  task  of  the  next 
quarter  of  a  century  is  to  carry  out  into  all  its  ramifications  an 
elaboration  and  a  more  adequate  comprehension  of  this  doctrine 
of  the  social,  rather  than  the  individual,  forces  in  taxation. 

It  may  be  claimed,  however,  that  there  still  remains  a  field 
for  the  application  of  the  individual  theory  of  taxation,  because 
it  is  undoubtedly  true  that  in  many  cases,  at  all  events,  a  tax 
is  not  shifted,  but  is  really  borne  by  the  individual  who  pays  it. 
Although  we  may  grant  this  contention,  it  is,  I  think,  suscep- 
tible of  proof  that  even  from  the  individual  point  of  view  a 
great  change  has  taken  place  in  the  facts  of  modern  taxation, 
which  must  inevitably  react  upon  the  theory;  and  that  even 
this  putative  individual  basis  of  taxation  will,  on  closer  examina- 
tion, be  found  to  be  shot  through  with  social  considerations. 

We  come,  in  other  words,  to  the  great  question  which  has  long 
vexed  the  minds  of  scholars  and  taxed  the  energies  of  statesmen, 
as  to  what  really  is  the  test  and  measure  of  the  obligation  of  the 
individual  to  contribute  to  the  support  of  government.  Even 
assuming  that  every  individual  bears  the  burden  of  what  he 
actually  pays  to  the  state,  how  shall  this  burden  be  apportioned? 
Two  answers,  as  is  well  known,  have  been  given. to  this  query. 
Yet  each  has  failed  to  satisfy  the  rigorous  demands  of  modern 
investigation;  the  one  because  it  is  plainly  inadequate,  the  other 
because  it  has  hitherto  been  incorrectly  interpreted. 

The  answer  that  was  ahnost  universally  given  in  the  earlier 
stage  of  fiscal  inquiry  was  that  individuals  should  contribute 
to  the  support  of  government  in  accordance  with  the  benefits 
or  advantages  which  they  derived  from  government  action. 


S36 


ESSAYS  IN  TAXATION 


f 


This  has  now  become  known  as  the  Benefit  Theory  of  taxation. 
The  state  was  conceived  of  as  a  large  joint-stock  company,  in 
which  the  individual  citizens  were  shareholders;  and  each 
citizen  was  imagined  to  derive  from  the  operation  of  this  cor- 
poration a  definite  amount  of  profits  in  accordance  with  his  in- 
vestment in  the  enterprise.  Since  the  operations  of  government 
were  not  designed  to  yield  a  dividend  in  actual  money,  the  prof- 
its were  conceived  of  primarily  as  being  something  in  the  nature 
of  an  intangible,  but  none  the  less  calculable,  dividend;  and 
smce,  in  the  minds  of  those  writers,  the  chief  and  well-nigh  the 
sole  function  of  government  was  to  protect  life  and  property, 
the  quantum  of  benefit  that  each  individual  received  stood  in 
a  certain  proportion  to  his  wealth.  Taxes  hence  represent 
nothing  but  an  insurance  premium,  or  a  periodic  payment 
made  by  the  individual  in  order  to  guarantee  the  continuance 
of  his  profits  in  this  joint-stock  enterprise.  The  theory  of  bene- 
fit or  protection,  although  now  almost  completely  abandoned 
by  scholars,  still  lingers  in  the  minds  of  some  writers,  and  is 
found  to  a  considerable  extent  in  the  tax  decisions  of  the  courts 
of  Anglo-Saxon  countries,  where  the  force  of  precedent  is  so 
enormous. 

The  reason  why  the  benefit  theory  of  taxation  has  been 
abandoned  is  two-fold.  In  the  first  place,  even  on  the  assump- 
tion that  the  theory  involves  a  correct  interpretation  of  the 
relations  of  the  individual  to  the  government,  a  more  rigid 
analysis  discloses  the  fact  that  the  benefits  conferred  by  govern- 
ment on  individuals  do  not  stand  in  any  such  relation  to  wealth 
—whether  to  property  or  to  income— as  had  been  imagined. 
Even  granting  that  the  sole  function  of  government  is  to  pro- 
tect property,  it  does  not  follow  either  that  it  costs  the  govern- 
ment twice  as  much  to  protect  property  of  twice  the  amount, 
nor  that  the  smaller  property  owner  feels  that  he  is  getting  only 
one-half  the  benefits  on  his  own  property  that  the  larger  pro- 
prietor receives  on  his.  Furthermore,  it  is  obvious  that  the 
government  protects  persons  as  well  as  property,  and  the  per- 
sonal protection  realized  by  a  poor  man  is  no  less  valuable  to 
him  than  the  personal  protection  afforded  to  a  rich  man.  Still 
further,  however,  it  soon  became  apparent  that  government 
is  more  than  the  mere  watchdog  of  society,  and  that  protection 
does  not  exhaust  its  functions.  As  soon,  however,  as  we  con- 
sider the  other  functions  of  government,  the  fallacy  of  the 
benefit  theory  becomes  evident.    For  the  advantages  derived 


A  QUARTER  CENTURY'S  PROGRESS  IN  TAXATION    337 

by  individuals  from  government  action  are  found  to  be  in  large 
measure  not  in  direct,  but  in  inverse,  proportion  to  their  wealth. 
The  poor  man  sends  his  children  to  a  public  school,  the  rich 
man  resorts  to  a  private  school;  the  poor  man  depends  for  fire 
protection  or  sanitation  upon  the  efforts  of  government,  the 
rich  man  avails  himself  of  the  services  of  the  best  appliances 
and  the  foremost  experts;  the  poor  man,  in  last  instance,  re- 
sorts to  poor  relief  or  state  pensions;  the  rich  man  needs  no 
such  assistance.  In  almost  every  domain  of  modern  govern- 
mental activity,  it  may  thus  be  contended  with  some  degree 
of  truth  that  the  direct  benefits  of  state  action  are  frequently 
in  inverse  proportion  to  the  wealth  of  the  individual.  A  theory 
which  would  practically  result  in  placing  greater  burdens  upon 
the  poor  man  than  upon  the  rich  man  must,  therefore,  be  de- 
fective in  one  of  its  premises. 

The  second  and  chief  reason,  however,  why  the  benefit  theory 
of  taxation  was  abandoned  is  that  the  whole  foundation  of 
political  philosophy  on  which  it  was  erected  was  recognized 
as  insecure.  The  modern  theory  of  poUtical  science  rests  upon 
the  more  organic  conception  of  the  relation  of  the  individual  to 
the  state;  it  recognizes  the  fact  that  the  public  collective  wants 
are  as  much  a  part  of  the  nature  of  civilized  man  as  are  his 
individual  private  wants;  and  that  the  essence  of  taxation  is  a 
moral,  as  well  as  a  legal,  obligation.  The  government,  indeed, 
must  do  something  for  the  community  in  return  for  the  support 
which  it  receives.  But  this  reciprocal  obligation  on  the  part 
of  the  government  is  not  toward  the  individual  as  such,  but 
toward  the  individual  as  a  part  of  the  greater  whole.  The 
special  benefit  is  swallowed  up  in  the  common  benefit.  The 
special  benefit  to  the  individual  is,  in  most  cases,  even  not 
measurable;  for  the  distinguishing  characteristic  of  modern 
civilization  is  the  spread  throughout  the  community  of  these 
impalpable,  non-material  results  of  good  government  which 
make  for  the  common  welfare,  and  especially  for  the  higher 
life.  In  its  ideal  form  at  all  events,  the  state  must  be  likened 
not  to  a  joint-stock  company,  but  to  a  family.  The  citizens 
are  not  stockholders  but  brethren,  animated,  if  they  are  patriots, 
by  the  same  ideals  and  by  the  same  fine  sense  of  co-operation 
in  the  common  interest.  Whatever  the  test  of  this  moral  ob- 
ligation to  contribute  to  the  support  of  the  whole  may  be,  it 
is,  in  the  state  as  little  as  in  the  family,  assuredly  not  the  meas- 
ure of  benefit  received.    Not  only  is  the  test  wholly  imprac- 


338 


ESSAYS  m  TAXATION 


ticable,  but  if  it  were  practicable  it   would   be   completely 
inadequate. 

It  may  be  claimed,  indeed,  that  this  analogy  of  the  state  to 
the  family  is  strained,  and  that  cases  do  arise  where  the  govern- 
ment undergoes  a  certain  expense,  and  actually  performs  a 
definite  service,  for  the  particular  individual,  the  benefits  of 
which  are  separably  and  measurably  calculated.    Such  a  case  ob- 
tams,  for  instance,  when  the  government  sells  gas  to  the  individ- 
ual, or  makes  a  charge  for  a  certain  permit,  or  demands  that 
the  cost  of  an  improvement  which  inures  particularly  to  the 
benefit  of  a  given  set  of  individuals  be  borne,  in  whole  or  in  part, 
by  them.    While  this  claim  may  at  once  be  conceded,  it  must 
be  pointed  out  that  such  payments  do  not  come  under  the  head 
of  taxes,  properly  so  called.     Even  though  there  is  still  much 
confusion  in  the  minds  of  our  legislators  and  our  judges,  we 
cannot  help  realizing,  as  we  look  back  upon  the  progress  of  the 
last  twenty-five  years,  that  one  of  our  chief  steps  in  advance  has 
been  a  more  proper  classification  of  public  revenues,  and  a 
recognition  of  the  fact  that  taxes  must  not  be  confused  with 
prices  or  with  fees  or  with  special  assessments.    What  we  have 
to  treat  of  here  is  not  the  whole  subject  of  government  revenues, 
but  the  special  topic  of  taxation.    In  a  tax  the  point  of  chief 
importance  is  the  prevalence  of  the  conmion  benefit,  and  the 
purely  incidental  character,  if  it  exists  at  all,  of  the  special 
benefit  to  the  individual.     Where  the  special  benefit  to  the 
individual  is  separately  calculable,  and  is  no  longer  a  purely 
incidental  result  of  government  action,  we  are  dealing  with 
something  that  is  not  a  tax  at  all. 

III.  Social  Considerations  and  the  Faculty  Theory 

When  the  benefit  theory  of  taxation  was  abandoned  it  was 
replaced  by  the  faculty  or  ability  theory.  This  theory  taught 
that  the  measure  of  general  obligation  to  the  support  of  govern- 
ment is,  in  the  state  as  in  the  family,  the  capacity  on  the  part  of 
the  individual  to  contribute  to  that  support.  This  seemed  to  be 
an  enlightening  and  comprehensive  proposition.  But,  as  in  the 
case  of  the  benefit  theory,  the  difficulty  arose  when  an  attempt 
was  made  to  analyze  more  closely  exactly  what  was  meant  by 
the  faculty  principle.  Perhaps  the  most  important  step  in  the 
analysis  was  taken  by  those  writers  who,  like  John  Stuart  Mill, 
conceived  the  essence  of  faculty  or  ability  to  reside  in  equality 


A  QUARTER  CENTURY'S  PROGRESS  IN  TAXATION    339 

of  sacrifice.  That  is,  they  measured  the  ability  of  the  individual 
to  pay  taxes  by  the  amount  of  sacrifice  that  would  be  imposed 
upon  him  by  the  burden  of  the  payment.  I  do  not  here  speak 
of  the  various  suggestions  that  have  been  put  forward  to  ascer- 
tain the  objective  norm  of  this  faculty  so  interpreted,  further 
than  to  recall  the  gradual  evolution  from  the  test  of  expenditure 
to  that  in  turn  of  property,  of  product,  and  of  income.  The 
important  point  for  our  purpose  is  that  the  subjective  measure 
of  the  obligation  was  found  to  consist  in  sacrifice.  It  is  true, 
indeed,  that  in  recent  times  this  explanation  of  Mill  has  been 
further  elaborated,  as,  for  instance,  in  the  suggested  substitution 
by  Professor  Edgeworth  and  by  Professor  Carver  of  the  principle 
of  minimum  sacrifice,  in  lieu  of  that  of  equal  sacrifice.  But  apart 
from  the  peculiar  difficulties  inherent  in  this  newer  version, 
upon  which  this  is  not  the  place  to  touch,  ^  we  are  confronted 
by  the  fact  not  only  that  fiscal  practice  does  not  conform  to 
the  general  theory  of  sacrifice,  but  that  the  doctrine  of  ability 
or  faculty  itself  has  been  assailed  by  recent  thinkers  as  in  some 
respects  unsatisfactory. 

While  there  is  some  force  in  the  objections  that  have  been 
urged,  they  are,  in  my  opinion,  not  sufficient  to  invalidate  the 
doctrine  of  ability  or  faculty,  if  correctly  interpreted.  Almost 
all  the  modem  writers  on  finance,  in  Germany  as  well  as  in 
England  and  elsewhere,  have  regarded  faculty  too  exclusively 
from  the  point  of  view  of  consumption.  The  whole  sacrifice 
theory,  whether  in  the  equal-sacrifice  or  in  the  minimum-sacrifice 
version,  deals  only  with  this  phase  of  the  problem.  It  asks  what 
is  the  burden  that  rests  upon  the  individual  in  virtue  of  his 
payment  of  taxes;  and  how  much  of  his  property  or  income 
remains  for  purposes  of  his  own  consumption.  It  is  through 
and  through  an  essentially  consumption  theory  of  finance.  A 
more  careful  analysis  of  the  doctrine,  however,  and  one  that  is 
more  in  harmony  with  the  actual  facts,  forces  us  to  the  conclusion 
that  the  consumption  side  of  the  theory  must  be  reinforced  by 
the  production  side.  In  estimating  a  man's  faculty  or  ability  to 
pay  we  must  not  alone  think  of  the  burden  imposed  upon  him  in 
parting  with  his  property  or  income,  but  we  must  also  consider 
the  opportunities  which  he  has  enjoyed  in  securing  that  property 
or  income. 

But  what,  it  may  be  asked,  is  the  real  import  of  this?    The 
1  For  a  discussion  of  these  doctrines  see  Seligman,  Progressive  Taxation, 
2  ed.  (1908),  pp.  285-289. 


si 


340 


ESSAYS  IN  TAXATION 


fi' 


» 


answer  is  obvious.    Manifestly,  as  soon  as  we  regard  the  produc- 
tion side  of  the  problem,  we  are  confronted  by  the  phenomenon 
of  privilege  m  all  its  manifold  forms.    If  an  individual  secures 
his  wealth  largely  through  his  own  unaided  exertions,  that  is  one 
thmg.     If,  on  the  contrary,  his  fortune  is  in  great  measure 
ascnbable  to  the  privileges  conferred  upon  him  by  law,  the  situa- 
tion IS  a  very  different  one.    The  privileges  render  it  easier  for 
him  to  create  and  to  augment  his  wealth,  and  the  real  sacrifice 
involved  is  the  sacrifice  of  acquisition,  as  well  as  that  of  disposi- 
tion.   The  older  theory  of  faculty  dealt  only  with  the  latter  kind 
of  sacnfice;  the  newer  theory  of  faculty  must  include  both  kinds. 
The  doctrme  of  abiUty  or  faculty,  as  thus  reinvigorated,  is 
not  only  free  from  objection;  it  is,  because  more  inclusive,  supe- 
rior to  any  of  the  rival  conceptions  that  now  divide  the  camp  of 
fiscal  thmkers.    Our  friends,  the  single  taxers,  for  instance,  who 
have  done  such  yeoman's  service  in  many  phases  of  fiscal  reform, 
commit  a  double  mistake;  first,  m  singling  out  a  particular 
privilege  as  the  only  one  to  be  reckoned  with;  and,  secondly, 
in  erecting  the  principle  of  privilege  into  an  independent  and 
all-sufl5cient  explanation  of  the  relation  of  the  individual  to  the 
government.     Some  of  them,  in  the  ardor  of  their  reaction 
against  the  faculty  theory,  even  go  so  far  as  erroneously  to 
Identify  the  privilege  theory  with  the  benefit  theory,  and  thus 
revert  to  the  old  and  discredited  explanation.    But  even  those 
who  do  not  go  to  this  length  nevertheless  see  in  the  doctrine 
of  privilege  an  all-embracing  and  adequate  principle.    As  I  have 
attempted  to  point  out  above,  however,  this  view  is  essentially 
incorrect,  because  it  looks  at  only  one-half  of  the  problem     It 
regards  solely  the  acquisition  of  wealth,  and  is  oblivious  of  the 
disposition  of  wealth.    The  older  faculty  theory,  as  it  has  been 
almost  universally  expounded,  errs  on  one  side  of  the  question- 
«ie  privilege  theory  errs  to  an  equal  extent  on  the  other  side! 
1  he  only  satisfactory  solution  of  the  problem  is,  while  upholdmg 
the  faculty  theory  of  taxation  as  over  against  the  old  benefit 
theory,  so  to  broaden  and  interpret  the  faculty  theory  as  to  make 
It  include  all  of  what  is  legitimate  in  the  privilege  theory,  with- 
out incurring  any  of  its  extravagances. 

This  new  interpretation  of  the  faculty  theory  also  enables 
us  to  explam  the  actual  progress  of  events  during  the  past 
quarter  of  a  century.  On  the  one  hand,  we  have  the  great  move- 
ment toward  the  income  tax,  a  movement  which  is  perceptible 
m  the  United  States  as  well  as  in  France  and  the  other  European 


A  QUARTER  CENTURY'S  PROGRESS  IN  TAXATION    341 


countries.  This  movement  is  the  direct  result  of  the  older  ele- 
ments involved  in  the  faculty  theory.  It  is  a  recent  movement 
in  the  United  States  simply  because  the  whole  faculty  theory  of 
taxation  is  of  comparatively  modern  acceptance.  But  the  two 
newer  modifications  of  the  income  tax  which  are  now  being  so 
hotly  discussed  all  over  the  world,  the  principle  of  graduation, 
and  the  principle  of  differentiation,  are,  consciously  or  uncon- 
sciously, the  result  in  part  at  least  of  the  other  side  of  the  faculty 
conception.  As  I  attempted,  many  years  ago,  to  point  out  in 
the  discussion  of  progressive  taxation,  the  consumption  side  of 
the  theory  alone  does  not  suffice  for  an  adequate  defence  of  the 
principle.  And  in  the  case  of  the  distinction  between  earned 
and  unearned  incomes  that  has  now  come  to  the  fore  with  such 
insistence  in  Great  Britain  as  elsewhere,  the  justification  of 
the  higher  rates  on  unearned  incomes  is  to  be  sought  in  large 
measure  in  the  principle  of  privilege,  and  especially  the  privilege 
of  inheritance.  It  is  the  same  privilege  of  inheritance  which  is 
responsible  for  the  great  development  in  recent  years  of  the  pro- 
gressive and  the  collateral  inheritance  taxes  all  over  the  world; 
and  it  is  a  social  privilege  of  a  different  but  of  not  less  important 
kind,  which  has  brought  into  the  forefront  of  political  discussion 
in  Germany,  and  in  England,  the  increment  duties  on  land.  In 
the  United  States  also  the  federal  corporation  tax  and  the  corpo- 
rate franchise  taxes  in  our  commonwealths  are  all  of  them  refer- 
able at  bottom  to  this  newer  idea  of  social  or  legal  privilege  as 
augmenting  the  faculty  or  ability  of  the  taxpayer,  whether  indi- 
vidual or  corporation.  Far  from  working  away  from  the  theory 
of  faculty,  the  events  of  recent  years  show  a  decided  approxima- 
tion to  the  doctrine  as  correctly  interpreted. 

We  see,  therefore,  that  the  chief  development  of  the  last 
quarter  of  a  century,  in  the  practice  as  well  as  in  the  theory  of 
taxation,  has  been  the  increasing  emphasis  laid  upon  the  social 
point  of  view.  In  a  great  domain  of  taxation,  as  we  have  just 
learned,  the  individual  point  of  view  has  been  completely  super- 
seded by  the  social  point  of  view,  and  the  study  of  the  incidence 
and  effects  of  taxation  has  emphasized  to  a  continually  greater 
extent  the  fact  that  the  individual  who  pays  a  tax  is  by  no  means 
always  the  person  who  bears  the  tax.  And  secondly,  as  we  have 
also  seen,  even  in  that  remaining  field  of  taxation  where  the 
individual  taxpayer  is  the  tax-bearer,  and  where  the  theory  of 
faculty  or  ability  to  pay  has  been  predicated  as  a  fundamental 
principle,  the  individual  element  in  this  theory  has  been  supple- 


lit 


342 


ESSAYS  IN  TAXATION 


* 


merited  by  the  social  element.  The  older  conception  of  sacrifice 
was  an  individual  conception;  the  newer  idea  of  privilege  is  a 
social  conception;  these  two  conceptions  have  joined  to  form 
the  modern  doctrine  of  capacity  or  ability  to  pay. 

Thus,  from  every  standpoint,  the  mdividual  idea  has  been 
permeated  with  social  considerations,  and  the  theory  of  finance 
is  taking  its  place  side  by  side  with  the  other  economic  doctrines, 
as  forming  an  outgrowth  of  the  modern  application  of  social 
considerations  to  the  older  individual  conception.  Economics 
is  now  sometimes  called  Social  Economics;  the  newer  theory  of 
finance  might  also  well  be  called  the  Social  Theory  of  Finance.^ 

IV.  Conflicts  Between  Tax  Jurisdictions 

No  survey  of  recent  tendencies  in  taxation  would  be  com- 
plete, however,  without  some  allusion  to  the  changes  that 
have  been  brought  about  by  the  question  of  various  tax  juris- 
dictions, and  of  the  conflicts  between  them.  In  all  modern 
nations  we  are  struck  by  the  attempt  to  adjust  the  fiscal  rela- 
tions of  state  and  locality;  and  in  all  federal  commonwealths 
we  have  the  added  complication  of  the  adjustment  between 
state  and  nation.  What  does  the  experience  of  the  last  twenty- 
five  years  teach  us  with  reference  to  both  the  theory  and  the 
practice  of  these  problems? 

Let  us  take  up  first  the  question  of  the  relation  of  general 
and  local  finance.  Here  we  at  once  notice  the  obvious  fact 
that  the  tendency  everywhere  is  to  confine  the  local  tax  to 
real  estate.  Originally,  as  is  well  known,  all  taxes  were  pri- 
marily local;  and  we  therefore  find  local  revenues  derived  from 
a  whole  category  of  imposts.  Everywhere  the  general  prop- 
erty or  the  general  income  tax  formed  a  large  part  of  the  local 
revenue,  and  in  earlier  times  it  was  supplemented  by  a  code 
of  taxes  on  consumption,  a  system  which  still  survives  in  many 
cities  of  the  European  continent.  When  state  taxes  developed, 
they  were  either  tacked  on  to  the  local  revenue,  as  is  still  the 
custom  in  the  United  States;  or  where  tax  administration 
had  become  national,  as  in  France  and  some  other  European 
countries,  the  reverse  process  occurred  and  local  taxes  were 
now  tacked  on  to  the  state  revenues.    It  is  here  now  that  we 

1  This  theory  is  not  to  be  confused  with  the  socio-political  theory  of 
taxation  which  is  sometimes  associated  with  the  name  of  Adolf  Wagner, 
and  which  has  been  elsewhere  discussed  by  me.  See  SeUgman,  Progres^ve 
Taxation,  2  ed.  (1908),  pp.  129-132. 


A  QUARTER  CENTIRTS  PROGRESS  IN  TAXATION    343 

notice  a  most  instructive  evolution.     I  need  not  stop  in  this 
place  to  emphasize  the  great  economic  changes  which  rendered 
the  general  property  tax  of  earlier  days  unfitting  and  inopera- 
tive.   But  I  do  want  to  accentuate  the  fact  that  has  been  lost 
sight  of,  that  the  reason  of  the  decay  and  the  disappearance 
of  the  general  property  tax  all  over  Europe  was  not  only  the 
break-up  of  the  original  mass  of  property  into  its  constituent 
elements,  but  also,  to  an  equally  great  extent,  the  fact  that 
the  administration  of  the  general  property  tax  remained  local, 
while  the  basis  of  the  revenue  derived  from  property  was  now 
becoming  general.    In  other  words,  an  important  cause  of  the 
failure  of  the  general  property  tax  was  the  attempt  to  apply 
local  administrative  methods  to  what  was  now  essentially 
fitted  only  for  general  administrative  methods.     Individual 
property  and  individual  income  can  not,  in  modem  times,  be 
localized;  and  therefore  a  local  tax  on  general  property  or 
general  income  becomes  increasingly  difficult  to  administer. 
This  is  one  of  the  chief  reasons  why  the  general  property  tax 
is  becoming  a  farce  in  the  United  States,  just  as  it  explains 
why  it  has  long  since  disappeared  practically  everywhere  else 
in  the  civilized  world.    But  it  also  enables  us  to  understand 
the  reason  why  the  modern  income  taxes,  and  even  the  prop- 
erty taxes  where  they  exist,  are  based  upon  the  broader,  and 
not  the  narrower,  administrative  foundation. 

What  applies  to  the  general  property  tax  applies  to  many 
other  general  taxes.  The  one  important  category  of  revenue, 
however,  to  which  this  administrative  shortcoming  does  not 
apply  is  the  tax  on  real  estate,  and  thus  everywhere  we  find 
local  taxation  coming  more  and  more  to  assume  the  form  of 
a  tax  on  real  estate.  In  some  countries,  as  in  England  and 
Australia,  this  is  now  the  fact  by  law.  In  some  places,  like 
the  more  developed  industrial  centres  of  the  United  States, 
it  is  now  virtually  a  fact  by  custom.  In  France,  indeed,  the 
movement  has  only  just  begun,  but  is  quite  perceptible;  while 
in  Germany  the  well-intentioned  reforms  of  the  early  nineties 
have  been  in  part  blocked  by  the  selfish  but  unreasoning  op- 
position of  the  landowners,  who  do  not  quite  realize  the  true 
economic  significance  of  the  process.  Indeed,  with  all  the 
disadvantages  and  absurdities  of  our  American  system  I  should 
say  that  the  system  of  local  taxation  in  the  United  States, 
as  it  is  fast  developing  in  actual  practice  in  the  most  advanced 
communities,  is  superior  to  that  which  exists  in  Germany  or 


344 


ESSAYS  LV  TAXATION 


II 


t 


I' I 


to  STwM  h  •  T  °,  '°'"^  "nportant  respects  not  inferior 
to  that  which  IS  found  in  England.  The  trouble  with  our 
American  scheme  is  that  the  facts  are  developing  in  spite  of 
the  law,  and  not  in  accordance  with  the  law.  The  tendency 
however,  throughout  the  world  toward  reliance  for  local  revenues 
upon  the  real  estate  tax  is  not  alone  indisputable,  but  also  in 
complete  harmony  with  the  newer  theories  of  finance 

t„  f«^„?!^fi  '"'•'  ''^u^^  P'"*''"""'  "'""^'y-  *he  relation  of  state 
to  federal  finance,  has  come  to  the  front  primarily  in  great 
empires  like  Germany,  Australia,  Canada  and  the  uLed 
fKr^!'  /').*^'^.''0"nt^  we  are  at  the  present  time  in  the  very 
throes  of  the  discussion.  As  we  have  pointed  out  elsewhere 
at  some  length,'  the  real  considerations  involved  in  the  choice 
tllTTt  •conflicting  tax  jurisdictions  are  the  considera- 
tions of  efficiency,  of  suitability,  and  of  adequacy.  Into  the 
further  discussion  of  these  subjects  I  do  not  intend  here  to 
tT„n'';n  ?^    ?r-.'^'l'''"'  ^"^  ""P*"''^'  emphasis.    The  situa- 

most  of  f  h'     ?^    '^  ^*^'''  '"  ^""^  """^^  '»"«'="'*  than  that  in 
most  of  the  other  empires  mentioned,  because  of  our  system 

of  constitutional  restrictions.  The  older  I  grow  and  the  mor^ 
!lT  ^i  Tt  '"  °  °"^  economic  and  fiscal  problem,  the  more 
senously  do  I  question  the  value  of  our  much-lauded  system 
of  constitutional  restrictions,  at  all  events  as  applied  to  th^ 
problems  in  hand.  We  see  the  embarrassments  on  all  sides, 
tl™    .  I  eountnes  have  been  able,  for  instance,  to  rid 

themselves  of  the  general  property  tax,  while  we  shall  have  to 

S^""?  w-'"'  '''^"°"'  y^"'  ^  *•>«  ^'ffort  to  overcome  the 

fa  al  tht"  '^"'  ',"  "°1  ?^  ""^  ^*"*^  eonstitutions.  And  so 
far  as  this  particular  problem  of  the  relation  of  federal  and 
state  finance  IS  concerned,  the  much  greater  progress  that  has 
been  shown  by  our  Canadian  neighbor,  not  to  speak  of  som^ 
of  our  friends  across  the  seas,  is  due  to  their  happy  immunity 
rom  the  dogma  of  state  rights.  Simply  because  of  the  accident 
that  when  our  constitution  was  formed  the  separate  states 
were  mdependent  and  jealous  of  each  other,  we  have  embedded 

SlVed  toT'"l""  ^  ''""''^  *'^**  '''  ^'^hts  not  Txpresty 
panted  to  the  national  government  are  reserved  to  the  states. 
Yet  immediately  across  the  border  we  have  a  nation  which  is 
toKlay  more  than  twice  as  populous  as  was  ours  when  the 
constitution  was  framed,  and  which  in  no  distant  future  is 
bound  to  become  as  great  and  as  mighty  an  empire  as  our  own; 

1  Infra,  chap.  xii. 


A  QUARTER  CENTURY'S  PROGRESS  IN  TAXATION    345 


and  yet  Canada  has  prospered  on  just  the  reverse  theory, 
namely,  the  theory  that  the  rights  not  granted  to  the  states 
are  reserved  to  the  national  government.  Under  this  system 
Canada  is  solving  not  alone  her  fiscal  problems,  but  many 
other  economic  problems,  in  a  far  more  successful  way  than 
are  we.  And  what  is  true  of  Canada  is  true,  in  a  large  measure, 
of  the  other  great  federal  states.  We  have  shackled  ourselves 
with  bonds  which  now  cramp  and  bind  our  well-rounded  develop- 
ment. We  have  erected  into  a  fetish  of  so-called  state  rights  or 
local  self-government,  a  theory  which  the  successful  career  of 
other  Anglo-Saxon  empires  has  shown  to  be  unnecessary  and 
embarrassing.  The  experience  of  the  last  twenty-five  years, 
if  it  conveys  any  lesson  at  all  in  fiscal  as  well  as  in  economic 
matters,  teaches  us  that  our  whole  constitutional  theory 
deserves   considerable   overhauling. 

Putting  these  considerations  into  practical  form  it  means,  as 
I  have  attempted  elsewhere  to  indicate,  that  the  income  tax 
of  the  future  in  this  country  is  to  be  in  first  instance  a  national 
income  tax;  and  that  so  far  as  the  corporation  tax  and  the  in- 
heritance tax  are  concerned,  the  almost  insuperable  obstacles 
to  overcoming  the  difficulties  of  interstate  conflicts  of  tax 
jurisdiction  may  be  removed  by  a  national  supervision  of  the 
taxes  imposed  by  the  states,  or  by  some  scheme  whereby  the 
taxes  in  question  will  become  national,  so  far  as  the  methods 
of  assessment  are  concerned,  even  though  the  proceeds  may  be 
apportioned  in  whole,  or  in  part,  to  the  separate  commonwealths. 
In  some  way  or  other  the  legal  facts  must  be  made  to  conform 
to  the  economic  facts.  In  some  form  or  other  the  structure  of 
government  must  be  put  into  harmony  with  the  content  of 
economic  life. 

The  last  quarter  of  a  century,  therefore,  which  has  seen  such 
enormous  changes  in  the  economic  basis  of  society,  is  bringing 
about  equally  vast  changes  in  the  theory  and  practice  of  taxa- 
tion. Summed  up  in  a  few  words,  this  movement  means,  on  the 
one  hand,  the  reconciliation  of  efficiency  with  justice,  or  rather 
the  attainment  of  justice  through  efficiency;  and,  on  the  other 
hand,  it  means  the  correlation  of  the  older  individual  and  the 
newer  social  elements  in  the  problem.  The  struggles  over  the 
budget  in  England,  over  the  income  tax  in  France,  over  the 
revenue  code  in  Germany,  are  all  of  them  symptoms  of  this 
newer  spirit.  And  in  the  United  States  the  effort  to  aboHsh 
the  iniquitous  general  property  tax;  the  attempt  to  secure  a 


346 


ESSAYS  IN  TAXATION 


I   I 

11 


separation  of  the  sources  of  state  and  local  revenue;  the  develop- 
er. 1%'^f'u''^'*^^'  supervision  over  local  assessments;  the 
endeavor  to  hold  individuals  and  corporations  up  to  their  obliga- 
tions to  the  treasury;  the  movements  to  modify  our  system  of 
import  and  mtemal  revenue  duties,  and  to  supplement  them  by 
an  income  tax;  and  above  all,  the  tendency  toward  the  spread 
of  the  mhentance  tax  and  the  incipient  discussion  as  to  the 
apphcability  of  the  theory  of  unearned  increment  to  land 
taxes  —all  of  these  but  emphasize  the  lesson  which  we  have 
sought  to  convey.     The  civihzed  world,  in  its  rapid  onward 
sweep  is  fast  realizmg  aU  these  newer  ideas  in  taxation.    It  re- 
mains for  the  student  to  analyze  and  to  explain  the  situation,  and 
by  clanfymg  the  conceptions  of  statesmen  as  to  the  real  import 

iLlT  nf  ^^T'  ^u  P^*  *^""^ '''  ^  P^^itiori  to  become  the 
forln^f  i  *^^  P^^Pl^  ^ho  are  the  ultimate  arbiters  in  this  quest 
for  justice  and  m  this  endeavor  to  reflect  in  fiscal  institutions  the 
Highest  aims  of  economic  and  social  progress. 


CHAPTER  XI 

THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES  * 

I.  The  Present  Difficulties 

The  discontent  with  the  conditions  of  American  taxation 
is  growing  apace.  The  reason  is  not  far  to  seek.  On  the  one 
hand,  the  development  of  industrial  democracy  is  everywhere 
creating  greater  demands  upon  the  pubHc  purse  for  a  collec- 
tive action  which  shall  be  in  the  interests  of  the  entire  com- 
munity; on  the  other  hand,  the  growth  of  prosperity  and  the 
transition  from  more  primitive  economic  conditions  to  those 
of  a  complex  industrial  society  are  rendering  more  and  more 
inadequate  the  fiscal  basis  and  the  fiscal  machinery  which  have 
been  bequeathed  to  us  by  our  ancestors.  Thus  at  both  ends 
the  pressure  is  felt.  The  fiscal  needs  are  multiplied  and  the 
fiscal  machinery  is  getting  out  of  gear.  Expenditures  are  grow- 
ing, and  the  old  forms  of  revenue  are  no  longer  suitable.  Hence 
the  pressure  of  public  needs  upon  public  resources.  And  since 
these  public  needs  are  augmenting  most  rapidly  in  the  domain 
of  local  rather  than  of  national  government,  it  is  primarily  ques- 
tions of  state  and  local  revenues  that  are  becoming  increasingly 
embarrassing. 

It  would  be  a  mistake,  however;  to  suppose  that  the  public 
resources  are  in  themselves  inadequate.  The  fault  does  not 
lie  with  the  social  income.  National  prosperity  is  great  and 
growing,  and  the  increase  of  wealth  and  of  social  income  is 
proceeding  unchecked.  Were  our  state  and  local  resources 
marshalled  and  organized  for  fiscal  purposes  as  is  done  by  the 
national  government,  the  embarrassment  would  soon  vanish. 
We  all  know  that  in  normal  times  there  has  never  been  the 
slightest  difliculty  in  securing  a  revenue  for  national  purposes 
which  should  be,  not  only  abundant,  but  on  the  whole  satis- 
factory to  the  community.    We  know  equally  well,  however, 

^  This  chapter  is  reprinted  with  some  changes  from  the  paper  in  Addresses 
and  Proceedings  of  the  First  Annual  Conference  of  the  National  Tax  Associa- 
tion, New  York,  1908,  p.  485  et  seq. 

347 


348 


ESSAYS  IN  TAXATION 


that  what  has  been  so  successfully  done  by  the  national  govern- 
ment  is  very  imperfectly  accompHshed  by  our  state  and  local 
governments  The  wealth  is  there,  the  resources  are  there,  but 
the  method  of  tapping  the  resources  has  become  unsatisfactory, 
lopsided  and  unequal.  What  is  needed  is  a  readjustment  of 
the  system  to  make  it  fit  modern  necessities. 

In  an  empire  hke  the  United  States  the  problem  will  naturally 
assume  a  somewhat  different  form  in  various  sections.    Finance 
and  politics  are  but  the  ultimate  expression  of  economic  forces 
and  relations,  and  the  economic  conditions  vary  widely  through- 
out our  country.    The  transition  from  the  frontier  life  and  the 
activity  of  a  purely  agricultural  community  to  the  conditions  of  a 
highly  developed  and  complex  industrial  community  has  made 
far  more  progress  in  some  sections  than  in  others,  and  to  the 
extent  that  this  transition  has  only  begun,  the  older  methods 
^ssess  a  certain  measure  of  validity.    What  is  good  for  New 
York  is  not  necessarily  good  for  Mississippi,  nor  again  for  Utah 
But  notwithstanding  this  diversity  of  economic   conditions' 
there  are  certain  phenomena  which  are  common  to  all     The 
large  corporate  agencies  of  transportation  are  found  throughout 
the  country.    Some  of  the  great  trusts  are  selling  their  products 
in  the  httle  hamlets  as  well  as  in  the  important  commercial 
centres.     Certain  defects  in  our  fiscal  system  are  therefore 
being  recognized  as  common  to  the  whole  country,  and  with 
the  development  of  more  homogeneous  economic  conditions 
this  is  bound  to  be  increasingly  true  in  the  future.    We  have 
tax  commissions  wrestling  with  very  much  the  same  problems 
not  only  in  Massachusetts  and  New  York,  but  in  Minnesota 
and  Wisconsm;  not  only  in  Louisiana,  but  on  the  Pacific  slope 
What,  then,  are  the  chief  difficulties  in  our  tax  system  which 
are  coming  more  and  more  to  be  recognized  everywhere  through- 
out the  length  and  breadth  of  the  land?    I  should  sum  them 
up  under  eight  heads. 

First  and  foremost  is  the  breakdown  of  the  general  property 
tax,  which  IS  almost  everywhere  still  the  chief  reliance  of  state 
and  local  government.  The  general  property  tax  works  well 
only  amid  most  primitive  economic  conditions  for  which  alone 
It  was  calculated.  Ahnost  everywhere,  for  reasons  which  it  is 
unnecessary  here  to  recapitulate,  and  which  it  is  utterly  im- 
possible to  prevent,  personalty  is  slipping  from  under  The 
administration  of  the  general  property  tax  is  everywhere 
attended  with  increasing  difficulty,  and  in  our  large  industrial 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    349 


centres  it  has  become,  to  use  the  words  of  a  recent  tax  report, 
"a  howling  farce."  Everywhere,  north  and  south,  east  and 
west,  although  in  varying  degree,  comes  the  cry  that  the  at- 
tempt to  enforce  the  general  property  tax,  whether  by  listing 
bills  or  tax  ferrets,  by  oaths  or  by  inquisitors,  is  doing  much 
to  force  upon  the  average  citizen  habits  of  falsehood  and  cor- 
ruption. 

Second,  a  growing  lack  of  equality  in  tax  burdens,  not  only 
as  between  classes  in  the  community,  but  as  between  individuals 
of  the  same  class.  Where  land,  for  instance,  is  assessed  at  20 
per  cent  of  its  value  in  certain  counties,  and  at  80  per  cent 
or  100  per  cent  in  other  counties,  it  is  obvious  that  the  contri- 
bution to  the  state  tax  is  grossly  unequal  and  unfair. 

Third,  the  application  to  general  purposes  of  what  was 
intended  to  be  only  a  local  revenue.  All  direct  taxation  was 
originally  local  in  character,  and  the  assessment  of  property 
for  local  taxation  was  at  the  outset  a  comparatively  simple 
matter.  When  the  need  for  state  revenues  made  itself  felt, 
it  was  obviously  expedient  to  tack  on  to  this  local  taxation  a 
quota  for  general  purposes.  But  with  the  great  development 
of  state  functions,  and  with  the  breakdown  of  the  local  barriers 
of  commerce  and  industry,  what  was  originally  equal  soon  turned 
into  inequality,  and  the  attempt  to  fetter  interlocal  or  even  in- 
terstate business  conditions  by  the  bonds  of  purely  local  assess- 
ment has  proved  to  be  a  fruitful  source  of  difficulty. 

Fourth,  the  failure  to  make  modern  corporations  bear  their 
fair  share  of  taxation.  The  corporation  is  a  growth  of  the  last 
half  century.  It  was  unknown  when  the  present  framework 
of  our  tax  system  was  established.  The  attempt  to  force  the 
new  wine  into  the  old  bottles  is  not  only  spoiling  the  wine,  but 
cracking  the  bottles. 

Fifth,  the  failure  to  secure  adequate  compensation  from 
individuals  and  corporations  alike  for  the  franchises  and  privi- 
leges that  are  granted  by  the  community.  An  earnest  effort 
is  being  made  at  present  throughout  the  length  and  breadth  of 
the  land  to  repair  this  defect.  But  with  the  historic  system 
as  it  has  come  down  to  us  in  this  country  of  estimating  wealth 
in  terms  of  property  rather  than,  as  abroad,  in  terms  of  income, 
we  have  been  plunged  into  the  vortex  of  the  assessment  of 
franchise  values,  and  have  thus  been  compelled  to  attack  a 
problem  which  docs  not  even  exist  in  other  parts  of  the  world. 

Sixth,  the  undue  burden  cast  upon  the  farmer.    Practically, 


350 


ESSAYS  IN  TAXATION 


this  IS  the  problem  of  taxation  in  many  of  our  rural  districts 
and  in  all  agricultural  communities  where  the  failure  of  an 
adequate  revenue  system  and  of  the  readjustment  of  social 
resources  makes  it  impossible  to  secure  good  schools  or  fairly 
decent  roads  without  overburdening  what  is,  after  all,  the  chief 
source  of  American  prosperity. 

Seventh,  the  interference  Anth  business,  due  to  the  partial 
and  spasmodic  enforcement  of  antiquated  laws.     Witness  the 
attempt  m  some  states  suddenly  to  levy  a  mortgage  tax,  as 
recently  in  New  York,  where  the  entire  building  industry  wa^ 
thro^  mto  confusion;  or  the  attempt  in  other  states  to  enforce 
now  this  and  now  that  kind  of  property  tax  on  businesses 
which  led  to  a  change  m  the  location  of  the  business  rather  than 
to  any  mcrease  of  revenue.     The  harassing  of  the  individual 
busmess  or  the  fear  of  harassment  is  becoming  less  and  less 
defensible  m  the  delicately  adjusted  mechanism  of  modern 
business  society.    Over  a  century  ago  Alexander  Hamilton,  in 
his   amous  report  on  manufactures,  stated  this  golden  maxim: 
All  taxes  w'hich  proceed  according  to  the  amount  of  capital 
supposed  to  be  employed  in  a  business  are  inevitably  hurtful  to 
industry  and  are  particularly  inimical  to  the  success  of  manu- 
facturmg  industry  and  ought  carefully  to  be  avoided  bv  a 
government  which  desires  to  promote  it.     It  is  in  vain  that 
the  evil  may  be  endeavored  to  be  mitigated  by  leaving  it,  in 
the  first  instance,  m  the  option  of  the  party  to  be  taxed  to 
declare  the  amount  of  his  capital  or  profits." 

Eighth,  the  failure  to  make  great  wealth  contribute  its  due 
share  In  former  times,  where  property  was  fairly  equally 
distributed  and  conditions  simple,  inequalities  in  tax  burdens 
were  slight  and  unperceived.  Before  the  huge  aggregations  of 
modem  wealth  the  crude  tax  machinery  of  earlier  days  stands 
impotent.  And  yet  we  hug  ourselves  with  the  delusion  that 
all  that  is  necessary  is  to  patch  up  the  old  machinery,  whereas 
what  IS  really  needed  is  to  throw  the  old  machiner^  on  the 
scrap  heap  and  to  utilize  entirely  new  and  modem  instmments 
and  processes. 

II.   The  Meaning  and  Advantage  of  Separation 
We  must  recognize  the  fact,  however,  that  revolutions  of  this 
kind  occur  but  seldom.    The  only  method  of  achieving  substan- 
tial progress  in  society  is,  after  all,  by  attempting  to  go  forward 
step  by  step.    But  however  slow  the  change,  it  is  imperative 


THE  SEPARA  TION  OF  ST  A  TE  AND  LOCAL  REV  EN  UES    35 1 

that  the  goal  be  kept  clearly  in  mind  if  there  is  to  be  any  progress 
at  all.  If  we  move  step  by  step,  it  is  highly  important  that  each 
step  be  a  forward,  and  not  a  retrograde,  one.  Now  the  starting 
point  from  which  progress  of  all  kinds  must  set  out  at  the  present 
time  in  the  United  States  is,  apart  from  the  important  adminis- 
trative changes  to  be  touched  upon  later,  the  abandonment  of 
the  use  for  state  purposes  of  a  locally  raised  and  administered 
revenue.  Whatever  other  reforms  are  needed,  and  they  are 
many,  no  lasting  progress  can  be  made  unless  we  take  this 
preliminary  step.  It  is  for  this  reason  that  we  have  ventured  to 
put  in  the  foreground  of  discussion  the  problem  of  the  separation 
of  state  and  local  revenues. 

The  utilization  of  the  same  sources  for  both  purposes  is,  as 
we  have  seen,  a  natural  development,  at  least  in  Anglo-Saxon 
communities  where  the  spirit  of  self-government  has  always  been 
strong,  and  where  the  local  unit  has  been  the  cell  that  has  grown 
through  accretion  into  a  mighty  nation.  Yet  the  employment 
of  the  identical  sources  of  revenue  for  state  and  local  purposes 
has  not  only  helped  to  engender  many  of  the  difficulties  which 
have  been  adverted  to  above,  but  has  succeeded  in  confusing 
the  issue,  and  in  rendering  exceedingly  difficult  a  satisfactory 
solution  of  the  problem.  Where  each  local  community  finds 
that  its  interests  are  in  some  unaccountable  way  bound  up  with 
those  of  other  communities,  the  tendency  is  to  induce  an  unwil- 
lingness to  experiment  with  any  changes,  no  matter  how  neces- 
sary, which  through  the  influence  of  these  common  interests 
may  perhaps  react  disadvantageously  upon  the  interests  of 
the  particular  community.  The  result  is  the  breeding  of  mutual 
suspicion  and,  what  is  still  worse,  of  lethargy.  Just  as  no  single 
individual  can  be  expected  to  submit  an  accurate  list  of  his 
taxable  property  when  he  is  sure  that  his  neighbors  are  all 
successfully  withholding  their  own,  so  no  community  will  be 
willing  to  make  any  change  in  methods,  the  result  of  which 
would,  in  all  probability,  only  be  to  increase  its  common  burdens. 
The  separation  of  state  and  local  revenues  is  therefore  a  matter 
of  importance  in  the  American  commonwealths  of  to-day,  not 
so  much  because  it  forms  in  itself  any  solution  of  the  problem, 
but  because  it  is  the  indispensable  initial  step  to  any  substantial 
and  lasting  progress.  The  separation  of  state  and  local  revenues 
is  not  a  cure,  but  it  will  help  to  make  a  cure  possible.  It  is  from 
this  point  of  view  that  we  must  address  ourselves  to  the  problem. 

There  are  four  aspects  of  the  subject:  First,  what  is  meant 


1 


im 


't 


352 


ESSAYS  IN  TAXATION 


by  separation  of  state  and  local  revenues?  Second,  what  are 
Its  advantages?  Third,  what  are  the  objections  and  possible 
dangers?  And  fourth,  what  has  thus  far  been  its  history  and  de- 
velopment? ^ 

I.  In  the  first  place,  separation  denotes,  as  the  word  implies, 
some  distmction  between  the  classes  of  revenue.  Almost  every- 
where m  the  United  States  the  general  property  of  individuals 
is  assessed  for  local  purposes;  and  as  corporations  developed, 
their  property  was  also  assessed  in  the  same  way  by  local  asses- 
sors.  County  expenses  are  usually  defrayed  by  apportioning 
the  necessary  amount  to  the  locahties  according  to  the  assessed 
valuation  of  property  and  thus  adding  a  county  rate  to  the  local 
rate.  J^mally,  the  state  expenditures  are  defrayed  in  precisely 
the  same  way  by  dividing  up  among  the  separate  counties  a 
sum  proportioned  to  the  assessed  valuation  in  the  counties. 
1  hus  the  final  tax  rate  upon  property  is  made  up  by  the  addition 
of  these  various  rates.    But  the  assessment  and  the  collection 

wu^        ^^^^  ^^^^  ^^  ^^^  ^'-^^^^  ^^  ^^^^^  authorities. 

What  will  be  gained  by  the  separation  of  state  and  local 
revenue  is  that  the  state  revenues  will  no  longer  be  collected 
from  the  same  source  and  in  the  same  manner  as  the  local  reve- 
nues.   It  means  practically  that  there  will  be  no  state  tax  rate  on 
general  property  added  to  the  local  tax  rate  through  the  process 
of  apportiomng  state  expenditures  among  the  localities  according 
to  the  assessed  valuation.    It  implies  as  a  corollary  that  some 
other  method  of  securing  the  state  revenues  be  devised     The 
demand  for  separation  is  primarily  a  negative  rather  than  a 
positive  one;  it  is  destructive  rather  than  constructive.    It  leaves 
open  for  debate  what  particular  alternative  methods  should 
be  substituted     It  proclaims  in  no  uncertain  tones,  -Leave  to 
the  locahty  what  properly  belongs  to  the  locahty;  allot  to  the 
state  what  properly  belongs  to  the  state.'' 

II.  The  second  aspect  of  the  problem  is  a  discussion  of  the 
advantages  that  would  ensue  from  separation.  These  mav  be 
summed  up  under  the  following  heads:  A.  Conformity  with 
the  natural  division  of  government  functions  and  activities. 
B    Greater  equality  in  assessments.     C.  Lowering  of  the  tax 

"t?  n      ?•  ?'^Tr^   ""^  ''''''^'''^^   ^^^^^^^^   ^ity  and   county. 
J^.  Greater  flexibility  and  adaptation  of  means  to  end 

A.  The  first  advantage  is  conformity  with  the  natural  division 
of  government  functions  and  activities.  The  relation  of  govern- 
ment to  business  life  necessarily  changes  with  the  conditions  of 


I 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    353 


business  activity.  When  business  was  purely  local  in  character, 
as  was  true  in  former  times,  the  local  authorities  were  competent 
to  deal  with  it.  To-day  yet,  activities  connected  with  real 
estate  are  still  largely  of  this  character.  The  real  estate  cannot 
be  removed  from  the  locality,  and  the  benefits  and  burdens 
attaching  to  real  estate  are  still  to  a  very  large  extent  bound  up 
with  the  people  who  live  in  the  immediate  neighborhood.  What 
is  true  of  real  estate  was  originally  true  of  almost  all  economic 
phenomena.  But  it  is  no  longer  true.  The  scope  of  the  great 
industries  connected  with  the  transportation  of  wealth  and  the 
transmission  of  power  or  intelligence  is  obviously  no  longer  local 
in  character,  and  many  of  the  ordinary  corporations  and  busi- 
nesses are  stretching  out  with  an  activity  that  transcends  all  local 
bounds.  While  the  central  office  must  indeed  be  in  some  one 
locahty,  the  scope  and  content  of  the  activities  are  no  longer 
local,  and  in  the  great  majority  of  cases  any  attempt  to  estimate 
the  economic  capacity  of  the  business  or  corporation  to  bear  the 
tax  burdens  by  the  property  existing  in  that  locahty  would  be 
woefully  inaccurate.  Not  only  would  the  local  property  often 
be  in  no  proportion  at  all  to  the  local  sales,  but  even  the  local 
sales  would  not  be  any  index  of  the  relative  profits  or  tax-paying 
ability.  The  insurance  company  (although  situated  with  its 
head  office  in  some  one  town)  does  business  throughout  the 
entire  state;  the  railroad  may  have  four  tracks  in  a  little  country 
village  which  contributes  practically  nothing  to  the  traffic;  a 
bank  may  derive  its  profits  in  large  measure  from  out-of-town 
business.  Where  the  activity  is  primarily  interlocal  or  state, 
the  burden  should  be  interlocal  or  state. 

Not  only,  however,  is  there  this  natural  division  between 
state  and  local  functions,  but  even  where  the  phenomenon  itself 
is  purely  local,  experience  has  disclosed  in  some  cases  the  great 
advantage  of  assessment  by  state  rather  than  by  local  officials. 
Real  estate,  for  instance,  can  far  better  be  valued  by  officials 
of  the  neighborhood  who  are  cognizant  of  the  local  conditions, 
even  though  experience  has  shown  the  great  advantages  of  a 
centralized  or  state  control  over  the  local  assessments  in  order 
to  secure  an  mterlocal  equality.  But  the  admmistration  of  a 
liquor-license  law  is  apt  to  be  far  more  effective  if  completely 
divorced  from  local  uifluences.  It  is  for  such  a  reason,  for  in- 
■  stance,  that  the  liquor-license  tax  is  now  levied  in  New  York  by 
state  officials  with  a  far  greater  degree  of  efficiency  and  there- 
fore with  a  far  greater  resultant  revenue,  than  was  formerly  the 


,^^ 


354 


ESSAYS  IN  TAXAriON 


t 


it 


case.  So  iilso  certain  tiLxes  are  more  effective  when  resting  on  a 
broad  than  on  a  narrow  basis  of  assessment.  The  inheritance 
tax,  for  example,  is  obviously  unfit  for  a  source  of  local  revenue 
because  the  number  of  wealthy  individuals  who  die  in  any  one 
year  m  a  single  town  or  city  is  so  unpredictable  and  oscillating 
that  the  revenue  would  be  entirely  too  spasmodic.  Broaden  the 
base  by  takmg  in  the  whole  state,  and  the  amount  of  property 
passmg  by  death  from  year  to  year  will  be  found  to  fluctuate 
very  little. 

Thus,  from  the  double  point  of  view  of  historic  changes  in  the 
scope  of  government  functions  and  of  the  effectiveness  of  admin- 
istration,  a  clear  line  can  often  be  drawn  between  what  is  prop- 
erly a  state,  and  what  is  properly  a  local,  source  of  revenue. 

This  consideration  really  carries  one  step  farther  a  distinction 
which  IS  found  almost  from  the  beginning  of  our  national  exist- 
ence.   At  first,  there  was  no  line  drawn  between  national  and 
state  sources  of  revenue,  and  in  the  critical  years  succeeding 
the  Revolution  the  Union  had  to  depend  upon  requisitions  ad- 
dressed to  the  separate  states,  to  be  raised  by  them  in  the  same 
way  as  their  own  local  revenues.  With  the  collapse  of  this  system 
was  settled  once  and  for  all  the  principle  of  a  separate  and  inde- 
pendent national  revenue  from  sources,  in  part  at  least,  distinct 
from  those  of  state  revenue.     The  whole  domain  of  foreign 
commerce,  which  up  to  that  time  had  been  within  the  purview 
of  the  separate  states,  was  now  transferred  to  the  nation,  and 
the  force  of  historical  necessity  has  since  then  converted  certain 
forms  of  internal  taxation,  which  were  still  for  a  long  time 
administered  by  the  separate  states,  to  the  practically  exclusive 
possession  of  the  nation.    The  process  is  not  indeed  entirely 
complete,  and  we  are  even  now  debating  whether  certain  forms 
of  state  taxation  should  not  hereafter  be  relegated  to  the  general 
government.  1   The  point  which  it  is  desired  here  to  emphasize 
however,  is  that  the  principle  has  been  settled.    It  is  the  same 
principle  which  is  now  applicable  to  the  separation  of  revenues 
within  the  state.    It  was  the  financial  collapse  of  the  Confeder- 
acy whicli  brought  about  the  separation  of  national  and  state 
revenues.    It  is  the  practical  collapse  of  our  antiquated  fiscal 
system  within  the  states  which  is  just  beginning  to  bring  about 
the  separation  of  state  and  local  revenues.    The  change  in  the 
economic  conditions  at  the  end  of  the  eighteenth  century  was 
responsible  for  the  one;  the  change  in  the  economic  conditions 

*  See  infra,  chapters  xii.  and  xxi. 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    355 


at  the  beginning  of  the  twentieth  century  will  be  responsible 
for  the  other.  Thus,  the  first  advantage  of  the  separation  of 
state  and  local  revenues  is  the  fact  that  it  is  in  harmony  with 
an  underlying  principle  of  historical  growth. 

B.  The  second  advantage  is  the  securing  of  greater  equality 
in  assessments.    The  differences  in  assessed  valuations  in  various 
sections  of  our  states  have  everywhere  become  so  glaring  that 
the  last  few  decades  have  seen  in  almost  every  case  the  creation 
of  boards  of  equalization  designed  to  remedy  the  acknowledged 
evil.    It  is  equally  notorious,  however,  that  the  remedy  has  been 
entirely  inadequate  and  that  the  boards  of  equalization  have 
been  unable  to  accomplish  what  was  expected  of  them.    The 
inequaUties  go  on  almost  unchecked,  very  largely  for  the  reason 
that  the  members  of  the  state  boards  have  too  imperfect  a  knowl- 
edge of  the  local  conditions  to  admit  of  any  successful  revision 
of  property  valuations.    The  relegation  of  the  general  property 
tax  to  the  locaUties  will  at  once  render  unnecessary  any  equaliza- 
tion, for  if  the  state  revenues  are  secured  in  other  w^ays,  and  if 
the  general  property  of  individuals,  whether  real  estate  or  per- 
sonalty, is  not  directly  liable  for  state  purposes,  there  will  of 
course  be  no  inducement  for  the  local  authorities  to  seek  to 
lower  the  local  valuations  of  property.    For  purely  local  purposes 
it  makes  no  difference  whether  there  is  a  low  valuation  with  a 
high  tax  rate  or  a  high  valuation  with  a  low  tax  rate;  the  result 
is  precisely  the  same.    With  the  separation  of  state  and  local 
revenues  the  individual  landowner  in  one  part  of  the  state  will 
no  longer  be  casting  envious  glances  at  the  landowTiers  in  other 
parts  of  the  state,  and  this  mad  scramble  for  reduction  of  assess- 
ments will  be  checked.    It  will  depend  entirely  upon  the  people 
in  the  community  itself,  and  not  upon  those  in  other  communi- 
ties, whether  the  individual  tax  rate  shall  be  high  or  low.    It 
was  not  until  after  separation  was  achieved — and  as  it  was 
thought,  permanently— in  1906  in  the  state  of  New  York  that  it 
became  possible  to  raise  the  valuations  of  real  estate  in  New 
York  city  from  the  old  level  of  60-70  per  cent  to  the  new  level 
of  90-100  per  cent. 

It  is  sometimes  claimed  that  the  system  of  separation  will  not 
stop  undervaluation  of  real  estate  because  there  is  the  same 
struggle  between  the  separate  towns  in  a  county  as  between  the 
separate  counties  in  a  state.  The  reply  to  this,  however,  is  two- 
fold. In  the  first  place,  the  proportion  of  county  to  town  ex- 
penses is  apt  to  be  smaller  than  the  proportion  of  state  to 


> 


356 


ESSAYS  IN  TAXATION 


1 1 

f  I  ■ 


county  expenses,  where  the  state  expenses  are  still  apportioned 
m  the  od  manner.    The  relative  influence  of  county  culture 

wherTlr'^'T."  ''T'^^^  ^"^»^^-    ^-'  ^ecoZ;,Tel 
m^kLf^  ^«. not  true,  the  objection  can  be  eliminat;d  by 

7^2.1''"'^'''^  '^''''^''  ^^^*^  ^®^^^>  ^t^^d  of  village 

of  whlh?"T  T  K^  *^^1^^'^  advantage,  the  poHtical  aspect 
iH^f  not  shght.  Where,  as  at  present  in  some  c^ses, 
the  state  taxes  form  no  mconsiderable  part  of  the  whole,  the 
mlf^^^''^fl?  the  mdividual  property  owner  is  naturally  aug- 
men  ed  o  this  extent  Under  a  system  of  separation  of  state 
and  local  revenues,  with  a  relegation  of  the  property  tax  to  the 
localities,  the  rate  of  the  tax  will  naturally  be  lowered  by  the 
entire  amount  of  the  state  revenue  previously  derived  from 
-this  source.    In  the  development  of  the  system  in  New  York 

,"*^.^'^'  *^'l^^?'^^  ^^^^  ^^^^  ^^ight  with  the  legislal 
tors.  The  separation  of  state  and  local  revenue  means  a  reduc- 
tion of  direct  taxation  of  property.  <^  ^  t:uuL 

D.  The  fourth  advantage  is  the  removal  of  conflicts  between 
city  a^d  county.  The  present  situation  in  many  of  our  states 
IS  really  an  outgrowth  of  point  B  mentioned  above;  namelj 
the  mequahty  m  the  assessments  of  property.  Manv  of  the 
rura  counties  claim  that  since  there  is  aL  LgeTproport  on 
of  tangible  and  visible  property  within  their  borders  than's 
the  case  m  the  larger  cities,  the  property  actually  assessed 

Ltn  '"''  ^''fy'r''''''^'  ^^  ''''  '"^^^  proportions  the 
property  assessed  in  the  cities.    There  is,  therefore,  a  frequent 

t^ZZ"  T\^'''''t''^  equalization  to  raise  the  iotal  valua- 
tions m  the  cities  and  to  compensate  for  this  by  reducin-  the 
valuations  of    he  rural  districts.     In  a  state  like  New  York 
for  instance,  there  was  an  almost  annual  contest  marked  by 
bitterness  and  asperity,  leading  in  some  cases  to  the  threat  on 

made  to  create  a  separate  state.    The  segregation  of  state  and 
local  revenues  puts  with  one  blow  an  end  to  all  thLe  soured 

» The  movement  in  favor  of  replacing  local  by  county  assessors  has 
progressed  to  such  an  extent  that  in  1921  the  assessments  If  p^^HyJ^Te 
made  by  county  officials  in  twenty-five  states,  including  aU  the  Southern 
(except  Delaware  and  Louisiana)  and  Southwestern  states  and  twe" 
the  western  states  (Cabfomia,  Colorado,  Idaho,  Montana,  NebraTa  N^ 
vada.  North  Dakota,  Ohio,  Oregon,  Utah,  Washington,  and^omSg) 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    357 

of  difficulty  and  friction.  The  large  city  as  well  as  the  small 
town,  each  is  allowed  to  go  its  way  in  peace. 

E.  The  final  advantage  is  virtually  a  corollary  of  the  one 
just  discussed;  namely,  a  greater  flexibility  and  adaptation  of 
means  to  end.  If  each  locality  is  now,  through  the  separation 
of  state  and  local  revenues,  divorced  from  the  others  and  is 
left  to  work  out  its  fiscal  salvation,  to  a  certain  extent  at  least, 
independently,  it  is  obvious  that  each  locality  will  be  better 
able  to  adjust  its  fiscal  system  to  its  own  particular  fiscal 
needs.  The  conditions  of  a  commercial  metropolis  are  very 
different  from  those  of  a  country  hamlet,  and  what  may  be 
entirely  appropriate  in  the  second  case  may  be  found  to  be 
completely  unworkable  in  the  first.  The  slow  steed  and  the 
fleet  pacer  work  very  ill  together  in  harness:  set  each  of  them 
free  to  do  what  he  can  and  the  total  result  will  be  far  more 
satisfactory  for  all  concerned.  Uniformity  of  fiscal  methods 
is  desirable  only  where  there  is  a  uniformity  of  economic  condi- 
tions. If  we  allow  the  different  localities  to  experiment,  ^vithin 
certain  broad  lines,  as  to  the  fiscal  methods  best  suited  to  their 
own  prosperity,  the  result  is  ultimately  bound  to  be  an  adapta- 
tion of  fiscal  practice  to  economic  fact. 

Thus  from  each  of  these  five  points  of  view  the  benefits 
which  would  accrue  from  a  separation  of  state  and  local  reve- 
nues are  clear  and  undeniable.  But  so  strong  is  the  force 
of  custom  and  prejudice,  and  so  inadequate  is  the  ordinary 
analysis  made  of  the  situation,  that  the  movement  has  really 
only  just  begun  in  the  United  States. 

III.  The  Objections  to  Separation 

It  may  be  inquired,  however,  in  the  third  place,  are  there 
no  objections  to  the  system  of  separation  or  are  there  no  dan- 
gers connected  with  it?  ^    A  candid  consideration  would  compel 

1  The  objections  have  been  forcibly  urged  by  Professor  T.  S.  Adams  in 
the  Adiresses  and  Proceedings  of  the  First  Conference  of  the  National  Tax 
Association,  New  York,  1908,  pp.  515-527;  and  again  in  Readjustments  in 
Taxation  published  by  the  American  Academy  of  Political  and  Social 
Science,  1915,  pp.  131-139;  as  well  as  by  Professor  C.  J.  Bullock  in  an 
article  in  the  Quarterly  Journal  of  Economics,  vol.  24  (1910),  p.  43,  et  seq. 
Cf.,  however,  Addresses  and  Proceedings  of  the  Fourth  Conference  of  the 
National  Tax  Association,  1911,  p.  86. 

For  a  later,  more  comprehensive  and  juster  appreciation  of  the  controversy, 
see  Mabel  Newcomer,  Separation  of  State  and  Local  Revenues  in  the  United 
States,  Columbia  University  Studies,  vol.  76,  no.  2  (whole  no.  180),  1917. 


358 


ESSAYS  IN  TAXATION 


an  answer  in  the  affirmative.  A  closer  scrutiny  will,  however, 
result  in  the  conclusion  that  the  objections  are  exaggerated  and 
that  the  dangers  are  at  least  remediable. 

What  are  the  objections  and  dangers?  They  may  be  summed 
up  under  three  heads:  a  lack  of  suitable  state  revenues;  a 
lack  of  elasticity;  a  lack  of  suitable  local  revenues.  Let  us 
consider  these  in  turn. 

It  might  be  claimed  by  some  states  that  if  the  general  prop- 
erty tax  is  abandoned  as  a  source  of  state  revenue,  there  is 
nothing  to  put  in  its  place.     The  experience  of  the  more  ad- 
vimced  states,  however,  shows  the  fallacy  of  this  contention. 
Even  where  the  ordinary  business  corporations  have  not  assumed 
vast  proportions,  we  find  in  all  the  states  the  existence  of  the 
great  public-service  corporations.     Under  a  proper  system  of 
assessment,  the  tax  on  corporations  of  this  kind,  if  reserved 
primarily  for  the  state,   would  go  far  toward  defraying  all 
legitimate  state  expenses.    The  difficulty  now  is  that  in  many 
of  our  states  the  greater  part  of  the  taxes  on  corporations 
go  to  the  locahties,  where,  as  we  shall  see  in  a  moment,  they 
are  not  needed,  and  only  a  small  part,  if  any,  is  assigned  to 
the  state.     If  we  render  to  Caesar  what  belongs  to  Caesar,  the 
tax  on  corporations  will  go  primarily  to  the  state.    Another 
source  of  state  revenue  which  is  now  spreading  in  this  country, 
but  which  has  by  no  means  received  the  development  of  which 
it  is  susceptible,  is  the  inheritance  tax.    In  New  York  one-fifth 
of  the  state  revenue  was  at  one  time  secured  from  this  source 
and  the  same  is  true  in  many  foreign  countries.     Owing  to 
defects  in  the  principle  as  well  as  in  the  administration  of  the 
law,  the  inheritance  tax  in  many  other  states  is  very  ineffective 
But  New  York  again  has  shown  the  way.    Where  corporation 
and  inheritance  taxes  do  not  suffice,  other  sources  of  revenue 
stand  ready  at  hand.     There  is  no  reason,  as  we  have  seen 
above,  why  the  license  taxes  should  be  reserved  exclusively 
for  local  purposes.    In  the  Southern  states  the  license  or  oc- 
cupation taxes  have  for  a  long  time  gone,  in  part  at  least,  to  the 
state,  although  the  whole  Southern  system  is  capable  of  much 
improvement  in  this  and  other  respects.    Here,  again,  in  New 
York,  it  has  been  shown  what  can  be  done,  and  one-fifth  of  the 
state  revenue  came,  before  prohibition,  from  the  liquor-Ucense 
tax  alone.     In  short,  without  going  more  in  detail  into  this 
question,   which  is  susceptible  of  a  far  larger  treatment,  it 
may  be  said  that  there  is  scarcely  a  state  in  this  Union  where 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    359 

under  proper  methods,   adequate  sources  of  state  revenues 
could  not  be  discovered  and  effectively  employed. 

But  even  if  this  were  not  the  case,  and  if  it  turned  out  to  be 
difficult  to  secure  additional  sources  of  state  revenue,  there  is 
still  left  a  simple  and  efficacious  means  of  accomplishing  all  the 
advantages  that  can  be  derived  from  separation,  without  in- 
curring the  hazard  of  not  finding  sufficient  state  revenue.  This 
method  may  be  called  the  apportionment-by-expenditure  or 
apportionment-by-revenue  method. 

The  apportionment-by-expenditure  or  apportionment-by- 
revenue  method  may  be  described  as  follows:  At  present  the 
state  general  property  tax  is  distributed  among  the  counties 
by  apportioning  the  quota  of  each  according  to  the  assessed 
valuation  of  property.  The  apportionment-by-expenditure 
method  as  opposed  to  this  apportionment-by-valuation  method 
would  distribute  the  amount  to  be  raised  for  state  purposes 
to  each  county  on  the  basis  of  the  expenditure  in  whole  or  in 
part  or,  what  is  the  same  thing,  on  the  basis  of  the  revenues 
collected  to  defray  this  expenditure  within  each  county  and 
all  the  taxing  districts  contained  in  the  county.  The  advan- 
tages of  this  scheme  are  obvious. 

First  and  foremost,  it  would  permit  each  locality  to  raise 
its  revenues  as  it  chose  within  certain  broad  lines,  as  laid  down 
by  the  general  law.  The  apportionment  being  no  longer  ac- 
cording to  the  valuation  of  property  in  general,  but  according 
to  expenditures  or  revenues,  it  would  be  immaterial  to  any 
section  in  the  state  how  the  local  revenues  of  any  other  sec- 
tion were  raised.  The  important  point  would  be  the  extent  of 
the  revenue  and  not  the  manner  of  raising  it. 

It  was  mainly  to  secure  at  once  local  option  in  the  selection 
of  the  subjects  of  taxation  that  the  apportionment-by-expend- 
iture method  was  urged  by  IVIr.  Lawson  Purdy,  several  years 
ago.^    This  designation  of  local  option  is,  however,  not  entirely 

1  "liOcal  Option  in  Taxation,"  Proceedings  of  the  National  Conference  on 
Taxation,  under  the  auspices  of  the  National  Civic  Federation,  BufTal.o,  1901, 
p.  123  et  seq.;  also  separately  published  by  the  New  York  Tax  Reform 
Association.  In  this  paper,  Mr.  Purdy  is  perhaps  unduly  critical  of  the 
other  method  of  securing  separation  of  state  and  local  revenue.  The  appor- 
tionment-by-expenditure scheme  was  first  suggested  in  outline  by  Mr.  Allen 
Ripley  Foote  in  a  paper  on  general  tax  reform,  presented  to  the  State 
Commerce  Convention  of  New  York,  held  at  Utica  in  1899,  read  by  Mr. 
Purdy  and  published  in  Public  Policij,  vol.  ii.,  Jan.,  1900.  The  main  features 
of  the  scheme  are  elaborated  in  another  paper  by  Mr.  Foote  on  "A  State 


I 


11 


360 


ESSAYS  IN  TAXATION 


happy  in  that  it  does  not  adequately  describe  the  powers  to 
be  conferred  upon  local  communities.  Moreover,  the  term 
local  option"  has  become  so  intimately  associated  with  the 
liquor  problem  that  its  utilization  for  taxation  is  apt  to  become 
confusing. 

Secondly,  even  if  the  general  property  tax  were  retained 
for  the  basis  of  assessment  by  the  locahties,  the  apportionment- 
by-expenditure  method  would  result  in  a  more  equitable  dis- 
tribution of  the  burden  than  is  the  case  at  present.     For,  as 
has  been  explained,  it  is  notorious  that  assessments  of  personal 
property  in  the  rural  counties  are  almost  inevitably  higher 
when  compared  to  actual  values  than  is  the  case  in  the  cities. 
On  the  other  hand,  expenditures  or  revenues  correspond  much 
more  nearly  to  the  actual  taxable  abilities  of  the  communities. 
Hence,  apportionment  by  expenditure  would  bring  about  a 
more  equitable  distribution  of  burdens  than  is  the  case  at 
present.    A  careful  computation  that  was  made  several  years 
ago  in  New  York  when  the  board  of  equalization  still  appor- 
tioned the  state  tax  shows  that  under  this  new  system  the 
counties  which  would  pay  more  are  either  the  rich  counties 
which  contain  the  most  valuable  land  in  the  state,  or  the  coun- 
ties which  received  too  high  a  percentage  rating  from  the  board 
of  equalization.^ 

Thirdly,  the  apportionment-by-revenue  method  would 
tend  to  economy  in  both  state  and  local  government  Local 
extravagance  would,  to  a  slight  degree  at  least,  increase  the 
proportion  of  the  state  burden,  and  state  extravagance  would 
be  directly  reflected  in  a  higher  charge  on  the  localities. 
Tax  on  Local  Government  Incomes  proposed  as  a  Practical  Substitute  for  a 
htate  General  Property  Tax,"  in  the  Proceedimjs  of  the  Fifth  Annual  Conn 
ference  of  the  National  Tax  Association,  Columbus,  1912,  pp.  253-262 

Curiously  enough  a  precedent  for  this  method  may  be  found  in  the 
torntorial  penod  of  Iowa,  three-quarters  of  a  century  ago.  The  first  legis- 
lative assembly  of  Iowa  in  1839  enacted  a  law  providing  that  five  per  cent 
of  the  gross  amount  of  taxes  charged  on  the  county  assessment  rolls  should 
be  set  aside  by  the  county  commissioners  as  a  debt  due  to  the  territory. 
This  however  led  to  dissatisfaction  on  the  ground  that  since  the  terri- 
tonal  tax  was  levied  on  the  gross  tax  receipts  of  the  counties,  it  "was  regu- 
lated entirely  by  the  necessities  of  the  respective  counties,"  and  was  there- 
tore  not  distnbuted     upon  principles  of  exact  justice  to  all."    The  method 

TloTvn'^mil  tfv^o"^  ''^  ^^^^'    ^  ^'  ^'  ^""'^^'^'  ^^^''^  "^  '^'^'''^ 
'  The  figures,  prepared  by  the  New  York  Tax  Reform  Association,  are 
reprmted  in  Proceedings  of  the  First  Annual  Confere7ice  of  the  National  Tax 
Associatton,  New  York,  1908,  pp.  509-512. 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    361 

The  fourth  benefit  is  that  the  present  state  boards  of  equali- 
zation would  be  rendered  entirely  unnecessary,  for  the  whole 
matter  would  be  settled  by  a  mere  arithmetical  computation 
which  would  leave  no  room  either  for  favoritism  or  for  unin- 
tentional injustice. 

Finally,  fifthly,  since  it  would  be  necessary  to  have  full 
figures  of  statistics  and  revenues  of  all  counties  and  local  divi- 
sions, we  should  secure  at  once  a  system  of  comparative  local 
statistics  which  have  hitherto  been  almost  entirely  wanting  in 
most  of  the  states,  and  the  lack  of  which  is  a  serious  obstacle 
to  fiscal  form. 

The  chief  objection  to  apportionment  by  expenditure  or 
revenue  is  that  it  might  tend  to  prevent  desirable  expendi- 
tures in  the  more  progressive  communities.  The  force  of 
this  objection  is,  however,  not  so  great  as  it  seems.  For,  in 
the  first  place,  if  the  community  is  ready  to  subject  itself 
to  the  burdens  of  a  larger  expenditure  for  desirable  aims,  it 
will  scarcely  be  checked  by  the  slight  additional  burden  which 
would  result  from  the  increase  of  the  state  tax.  For  the  local 
burden  is  always  very  much  greater  than  the  state  burden. 
Moreover,  by  taking  the  average  expenditure  for  a  number  of 
years  previous  to  the  annual  assessment,  the  variations  due 
to  a  special  local  improvement  in  any  one  year  can  be  minimized. 
Secondly,  entirely  apart  from  these  considerations,  the  force  of 
the  objection  could  be  very  largely  attenuated  by  combining  the 
apporf ionment-by-expenditure  method  with  the  system  above 
described  of  an  independent  state  revenue  from  other  sources 
than  property.  If  this  were  done,  that  is,  if  the  greater  part  of 
state  revenues  were  derived  from  independent  taxes,  and  if  only 
the  necessary  residuum  were  raised  by  the  apportionment- 
by-expenditure  method,  the  proportion  falling  to  each  locality 
would  be  so  exceedingly  slight  as  virtually  to  rob  the  objection 
of  whatever  strength  it  might  be  supposed  to  possess. 

Finally,  it  might  be  contended  that  the  apportionment-by- 
expenditure  method  is  unjust  to  the  poorer  localities,  because 
it  would  interfere  with  the  present  American  method  of  school 
taxation.^  School  taxes  are  levied  according  to  assessed  valua- 
tion, but  are  frequently,  to  a  certain  extent  at  least,  distributed 
back  to  the  counties  and  localities  by  the  state  according  to 
population,  thus  equalizing  the  opportunities  of  the  richer  and 

»  This  objection  is  urged  especially  by  Bullock,  op.  cU.,  p.  447. 


U    -J 


I 


362 


ESSAYS  IN  TAXATION 


the  poorer  sections.  The  force  of  this  objection,  however, 
can  be  weakened  by  the  simple  expedient  of  exempting  such 
school  expenditures  from  the  operation  of  the  principle,  just 
as  they  are  now  excepted  from  the  ordinary  methods  of  local 
finance.  The  theory  of  the  apportionment-by-expenditure 
method  would  still  remain  intact,  and  its  automatic  features 
would  work  equally  well,  if  certain  expenditures  only,  instead 
of  all  expenditures,  were  selected.  What  these  expenditures 
or  revenues  should  be  would  be  a  matter  of  adjustment,  which 
might  diifer  in  the  various  states. 

It  is  interesting  to  observe  that  an  attempt  has  recently  been 
made  to  introduce  the  apportionment-by-expenditure  method. 
According  to  the  Oregon  law  of  1907,  the  system  of  apportioning 
taxes  according  to  expenditures  was  to  go  into  effect  in  1912. 
In  this  scheme,  however,  there  were  two  points  deserving  of 
special  mention.  The  first  is  that  the  apportionment  was  to 
be  made  not  according  to  all  expenditures,  but  only  according 
to  some  expenditures, — expenditures  for  roads  and  later  those 
for  interest  on  the  debt,  for  courthouses  and  for  fighting  pes- 
tilence being  deducted  in  each  case.  While  something  may  be 
said,  as  we  have  seen,  in  defence  of  these  exceptions,  the  case 
is  quite  different  with  the  other  point,  namely,  the  adoption 
of  the  rule  that  the  apportionment  was  to  be  made  according 
to  county  expenses  instead  of  according  to  the  total  expenses 
of  all  the  localities  within  the  county  as  well  as  of  the  county 
itself.  This  derogation  from  principle  is  difficult  to  justify. 
For  in  this  way  the  apportionment-l)y-c^xpenditure  method  is 
robbed  of  many  of  its  advantages.  It  would  have  had  the 
effect  of  penalizing  the  poorer  agricultural  counties,  for  the 
obvious  reason  that  county  government  is  of  relatively  less 
importance  and  absorbs  a  far  smaller  share  of  the  total  revenues 
in  counties  containing  cities  than  in  sparsely  settled  agricul- 
tural counties.^  The  law,  however,  was  never  put  into  opera- 
tion. For  in  1908  the  dissatisfaction  with  the  predetermined- 
valuation  basis  of  the  law  of  1901  led  to  a  lawsuit  which  resulted 
in  the  court  declaring  unconstitutional  the  variation  from  the 
ordinary  apportionment  through  equalized  assessments,  and 
thus  by  implication  making  the  projected  apportionment-by- 
expenditure  method  illegal.    Accordingly  no  attempt  was  made 

*  See  tin  address  by  Tax  Commissioner  C.  V.  Galloway,  "Taxation 
Developments  in  Oregon,"  in  the  Proceedings  of  the  Fifth  Conference  of  the 
National  Tax  Association,  Columbus,  1912,  p.  240. 


II 


THF.  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    363 

to  enforce  it.  The  tax  commissioner  of  Oregon,  however, 
maintained,  after  a  careful  statistical  comparison,^  that  the  ap- 
portionment-by-expenditure method,  properly  applied,  would 
yield  results  more  uniform  and  more  equitable  than  those 
achieved  by  the  old  system  on  which  the  state  now  again  relies. 

A  few  years  later  the  tax  commissioner  of  Connecticut  was 
converted  to  the  desirability  of  the  principle,^  and  in  1911  sub- 
mitted to  his  legislature  a  recommendation  and  a  bill  designed 
to  carry  it  into  effect.^  In  1915  the  reform  was  finally  accom- 
plished in  the  shape  of  the  apportionment-by-revenue  method. 
The  criterion  for  the  distribution  of  the  state  property  tax  was 
henceforth  to  be  the  proportion  of  receipts  from  all  taxing  dis- 
tricts in  each  town,  as  averaged  for  the  last  three  fiscal  years,  to 
such  total  receipts  from  taxes  in  all  the  towns  as  similarly 
averaged.^  The  plan  has  worked  since  then  to  the  satisfaction 
of  all  concerned.^  It  is  not  unlikely  that  the  views  of  the  Oregon 
and  Connecticut  officials  may  gradually  find  supporters  in 
other  states  as  well. 

Thus  we  see  that  the  contention  that  separation  of  state  and 
local  revenues  is  impossible  in  some  states,  because  of  a  lack  of 
adequate  state  revenues,  is  weakened,  if  not  entirely  overcome, 
by  the  adoption,  in  part  at  least,  of  the  alternative  method  now 
finding  its  way  to  the  front  in  some  of  our  commonwealths.  It 
must,  however,  not  be  supposed  that  the  principle  of  separation 
of  state  and  local  revenue  is  conditioned  by  the  acceptance  of  the 
apportionment-by-expenditure  method.  If  this  method  should 
on  the  whole  prove  to  be  unwise  or  inexpedient,  the  separation 
of  state  and  local  revenue  would  not  be  affected  thereby.    The 

^Op.  dt.,  p.  243. 

2  Cf.  William  H.  Corbin,  Tax  Commissioner,  Increased  Revenue.  Address 
before  the  Farmers^  Association  of  the  General  Assembly  (of  Connecticut) 
Wednesday  morning,  March  lOth,  1909,  p.  10. 

3  Cf.  Wm.  H.  Corbin,  "Apportionment  of  State  Taxes  on  the  Basis  of 
Local  Revenue, "  in  Proceedings  of  the  Fifth  Conference  of  the  Nationl  Tax 
Association,   1912,  pp.  263-269. 

*  The  receipts  of  each  one  include  the  amount  which  should  have  been 
received  as  specially  exempt  property  had  such  property  been  taxed 
similarly  to  other  property  in  the  town. 

^  The  tax-commissioner  tells  us  that  "the  present  law  is  a  vast  inprove- 
ment  on  the  previous  one.  ...  A  town  with  a  low  assessment  valua- 
tion and  a  high  tax  rate  is  put  on  the  same  basis  as  the  town  with  a  high 
assessment  valuation  and  a  low  tax  rate.  ...  An  incentive  for 
economy  is  offered  to  the  towns.  Report  of  the  Tax  Commissioners  of 
Connecticut  for  Biennial  Period,  1910  and  1920,  1920,  p.  39. 


364 


ESSAYS  IN  TAXATION 


separation  of  state  and  local  revenue  does  not  necessarily  imply 
either  complete  local  option  or  any  specific  method  of  apportion- 
ment.   They  do  not  stand  or  fall  together. 

The  second  possible  objection  to  the  scheme  of  separation 
IS  the  lack  of  elasticity  in  state  revenues.  Whatever  are  the 
drawbacks  of  the  general  property  tax  for  state  purposes,  it 
IS  undeniable  that  the  system  is  a  highly  elastic  one.  When 
the  state  needs  more  revenue,  it  simply  increases  the  tax  rate; 
when  it  needs  less  revenue,  it  diminishes  the  tax  rate.  By  aban- 
doning the  general  property  tax  for  state  purposes,  we  therefore 
lose  this  elastic  element  in  the  system. 

There  are,  however,  three  ways  of  reintroducmg  the  elas- 
ticity which  will  be  lost.    In  the  first  place,  the  elasticity  lost 
by  the  abandonment  of  the  general  property  tax  for  state 
purposes  might  be  regained  by  introducing  a  varying  rate  in 
one  of  the  other  taxes.    There  is  no  necessary  reason  why  the 
tax  rate  should  always  be  the  same  from  year  to  year.    In  the 
case  of  taxes  on  business  or  on  corporations,  indeed,  it  would 
be  highly  inadvisable  to  alter  the  rates  from  year  to  year  as 
tending  to  unsettle  business.    But  to  other  forms  of  taxation 
this  objection  would  not  apply.i     England  secures  elasticity 
by  varying  the  rate  of  the  income  tax  from  year  to  year.    There 
is  no  reason  why  in  the  American  states  the  rate  on  the  in- 
heritance tax  should  not  be  modified  from  time  to  time  so  as 
to  secure  a  slightly  greater  or  slightly  smaller  revenue.     The 
change  in  the  tax  rate  on  inheritances  cannot  very  well  bring 
about  a  change  in  the  death  rate  of  the  people  whose  property 
is  inherited.    Secondly,  if  the  above  scheme  should  not  approve 
itself  to  the  community,  we  might  adopt  the  suggestion  which 
was  accepted  by  the  New  York  Special  Tax  Commission  of  1907, 
namely,  that  the  state  should  accumulate  a  surplus  which  it 
would  hold  to  meet  any  possible  deficit,  and  that  if  the  surplus 
exceeded  a  certain  figure  it  should  be  automatically  returned  to 
the  localities  for  the  relief  of  local  taxation.     Thirdly,  how- 
ever, and  better  than  either  of  the  other  plans,  the  most  ob- 
vious and  simple  method  is  to  utilize  as  the  elastic  feature  the 
apportionment-by-expenditure  method  described  in  the  pre- 
ceding paragraphs.    If  any  more  money  is  needed  in  any  one 
year,  so  much  more  can  be  apportioned  to  the  counties. 

^  I  am  unable  to  share  the  fears  of  Professor  Bullock  in  this  respect   as 
expressed  in  the  article  cited  above.  ' 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    365 

In  one  of  these  three  ways  elasticity  could  without  much 
doubt  be  secured. 

The  third  and  final  objection  to  the  separation  of  state  and 
local  revenues  is  that  the  localities  cannot  afford  to  relinquish 
to  the  state  any  sources  of  revenue  which  they  now  possess. 
It  is  claimed,  for  instance,  that  many  of  the  rural  counties 
which  now  secure  a  large  revenue  from  the  tax  on  the  property 
of  the  transportation  companies  which  happen  to  traverse  them 
cannot  afford  to  lose  this  revenue. 

We  here  come  to  a  point  which  has  been  much  neglected  in 
the  discussion  of  the  subject;  namely,  an  insufficient  analysis 
of  what  is  really  implied  in  the  separation  of  state  and  local 

revenues. 

As  I  conceive  it,  there  are  really  two  kinds  of  separation 
which  might  be  termed  respectively  the  segregation  of  source 
and  the  division  of  yield.    Segregation  of  source  means  that  a 
different  source  of  revenue  should  be  utilized  for  state  pur- 
poses from  that  which  is  used  for  local  purposes.     It  is  this 
which  is  meant  when  we  say  that  the  state  should  no  longer 
derive  its  revenue  from  the  general  property  tax.     But  there 
is  an  entirely  different  method  of  attaining  the  same  result; 
namely,  by  the  exclusive  state  assessment  of  certain  sources 
of  revenue  coupled,  however,  with  an  apportionment  of  a  part 
of  the  proceeds  to  the  localities.    For  instance,  the  inheritance 
tax  ought  to  be  levied  by  the  state  and  not  by  the  locality; 
therefore  there  would  be  here  a  segregation  of  source  in  the 
assessment.    There  is,  however,  no  reason  why,  after  the  tax 
has  been  collected,  a  part  of  the  proceeds  should  not  be  ap- 
portioned to  the  localities,  although  not  necessarily  in  accord- 
ance with  the  sums  raised  therein.    As  to  the  corporation  tax 
the  best  plan  would  indeed  be,  as  we  have  learned,^  to  have  the 
state  levy  an  independent  tax  on  the  corporation  as  a  whole,  but 
to  reserve  to  the  localities  the  tax  on  the  corporate  real  estate  (or 
in  the  case  of  railroads  even  only  on  the  non-operative  railroad 
property)  with  the  further  allocation  to  the  locality,  in  case  of 
need,  of  a  portion  of  the  state  tax.    The  excise  tax  in  New  York 
was  admirably  administered  by  the  state  officials,  yet  one-half  of 
the  proceeds  was  returned  to  the  localities.   The  division  of  yield 
of  a  tax  is  perfectly  compatible  with  a  segregation  of  the  source 

»  Supra,  chap.  viii.  In  this  way  the  edge  would  be  taken  off  the  objections 
raised  by  Professor  Bullock  and  Professor  Brindley  that  a  revenue  from  cor- 
porations h  needed  for  local  purposes. 


366 


ESSAYS  IN  TAXATION 


of  a  tax.   The  trouble  with  our  present  system  is  that  we  attempt 
to  make  a  local  assessment  of  all  property  and  then  add  some- 
thmg  for  the  state,  thus  producing  all  the  evils  of  the  actual 
situation.     What  should  be  done,  and  what  is  beginning  to 
be  done  m  some  places,  is  to  leave  the  property  tax  on  individuals 
and  if  necessary  the  real  estate  tax  on  corporations  entirely 
to  the  local  divisions  and  to  develop  a  system  of  taxation 
assessed  in  first  instance  by  the  state,  but  with  an  apportion- 
ment among  the  localities  of  so  much  of  the  proceeds  as  may  be 
necessary.     We  must  not  confuse  segregation  of  source  with 
division  of  yield.     If  we  establish  a  separate  system  of  state 
taxes,  that  is,  a  tax  levied  and  assessed  in  first  instance  by  the 
state,  and  if  we  then  find,  as  can  easily  be  accomplished,  that 
the  revenue  is  more  than  adequate  for  state  purposes,  it  will 
be  a  simple  matter  to  arrange  for  a  distribution  of  the  overplus 
among  the  localities. 

As  stated  earlier  in  this  paper,  the  difficulty  is  not  with  the 
social  income  as  a  whole.    There  is  in  the  community  an  abun- 
dance of  wealth  wliich  has  never  been  tapped.   The  difficulty  lies 
in  the  present  method  of  apportioning  the  burden.    By  raising 
local  revenues  primarily  from  those  sources  which  exist  in  abund- 
ance in  the  localities,  and  which  are  by  nature  local  in  character, 
and  by  retaining  for  state  assessment  those  taxes  which  have 
a  wider  economic  basis,  we  can  be  just  to  all  demands  of  both 
state  and  locality  without  imperilling  the  fiscal  situation  in 
either,  and  at  the  same  time  securing  a  freedom  from  all  the 
difficulties  that  beset  us  at  present.     The  separation  of  state 
and  local  revenues  includes  two  distinct  phases,  the  segregation 
of  the  source  of  revenue  and  the  division  of  yield  of  the  tax. 
The  real  principle  is  to  reserve  a  direct  taxation  of  property  for 
the  localities  and  to  hand  over  to  the  state  all  the  other  impor- 
tant sources  of  revenue,  dividing  a  part  of  the  proceeds  among 
the  localities  and  possibly  making  up  any  part  of  the  deficiency 
for  the  state  through  the  system  of  apportionment  by  expendi- 
ture.   In  this  way  we  may  secure  all  the  advantages  of  separation 
of  state  and  local  revenue,  and  yet  avoid  the  dangers  and  pitfalls. 
It  will  be  seen  from  the  above  presentation  that  separation 
of  state  and  local  revenue  is  by  no  means  identical  with  what 
is  sometimes  called  local  option  in  taxation— a  term  in  itself 
unfortunate  for  reasons  that  have  been  mentioned  above.    Sepa- 
ration does,  indeed,  involve  some  measure  of  choice  by  the 
localities,  and  that  is,  in  fact,  one  of  its  great  advantages;  but 


II 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES     367 

local  option  may  obviously  be  carried  to  an  extreme.  The  lib- 
erty of  taxation  on  the  part  of  separate  local  communities  must 
not  be  permitted  to  disrupt  the  general  scheme  of  taxation,  or 
to  imperil  business  activities  through  a  rivalry  in  the  application 
of  the  taxing  power.  What  has  been  so  laboriously  gained  in 
state  taxation  through  the  intervention  of  the  national  authority, 
which  prohibits  the  state  taxation  of  interstate  commerce,  must 
not  be  lost  in  local  taxation  through  the  absence  of  state  control. 
What  the  separation  of  state  and  local  revenue  seeks  to  accom- 
pUsh  is,  as  we  shall  see  below,  to  make  it  possible  for  localities 
ultimately  to  exempt  personal  property  from  local  taxation.  So 
far  as  a  flexibility  of  local  revenue  may  render  this  possible,  it  is 
desirable  to  grant  to  the  locality,  at  least  to  this  extent,  a  lati- 
tude of  exemption.  But  this  is  far  from  being  synonymous  with 
a  general  demand  for  complete  local  option.  That  is  a  proposi- 
tion which  deserves  discussion  on  its  own  merits,  and  to  which 
valid  arguments  may  undoubtedly  be  opposed.^  Let  us  not 
endanger  the  attainment  of  the  principle  of  separation  by  con- 
founding it  with  a  far  more  radical  system  of  complete  local 
option. 

Another  widespread  fallacy  is  the  assumption  that  separation 
of  state  and  local  revenues  is  in  some  way  opposed  to  the  policy 
of  centralization  of  fiscal  administration,  which  is  now  proceed- 
ing apace  in  our  American  commonwealths  with  such  admirable 
results. 2  As  a  matter  of  fact,  there  is  no  opposition  at  all 
between  these  programs.  The  separation  of  state  and  local 
revenues  means  practically  that  the  central  or  state  government 
should  be  given  more  powers  in  the  original  assessment  of  certain 
taxes.  Under  the  primitive  system,  still  in  force  in  most  of  our 
states,  all  the  taxes  are  assessed  locally,  with  no  supervision  or 
interference  on  the  part  of  the  state  authorities,  save  through 

1  Cf.  the  article  by  Professor  Bullock,  "Local  Option  in  Taxation,"  in  the 
Proceedings  of  the  Fifth  Conference  of  the  National  Tax  Association,  1912,  p.. 
271  et  seq.  Professor  Bullock  concedes  that  there  is  no  necessary  connec- 
tion between  local  option  and  separation  of  state  and  local  revenues. 

2  Neither  Professor  Adams  nor  Professor  Bullock  can  be  declared  free 
from  a  share  in  this  error,  if  we  are  to  judge  from  the  articles  mentioned 
above  on  page  357,  note  1.  The  same  may  be  said  of  Professor  Brindley, 
"The  Problem  of  Tax  Reform  in  Iowa,"  in  Addresses  and  Proceedings  of  the 
Fourth  Conference  of  the  National  Tax  Association,  1911,  pp.  155-156.  Yet 
in  the  same  breath  while  opposing  segregation  Professor  Brindley  advocates 
"the  local  taxation  of  local  business  and  local  property  and  the  state  taxa- 
tion of  business  and  property  which  is  non-local  in  character"! 


368 


ESSAYS  IN  TAXATION 


I  i 


I 


the  ineflfectual  device  of  the  state  boards  of  equalization.  Under 
the  more  modern  system,  first  one  and  then  another  source  of 
revenue  is  taken  over  by  the  state  government  and  administered 
directly  by  it,  instead  of  by  the  locality.  This  is  the  case  with 
the  railroad  taxes  in  most  of  our  states,  with  the  corporation 
taxes  in  general  in  many  of  our  states,  and  with  the  liquor  li- 
censes in  some  of  our  states.  The  same  is  true  of  the  newer 
taxes  the  assessment  of  which  has  never  been  in  the  hands  of 
the  local  authorities  at  all,  like  the  inheritance  tax  and  the 
New  York  stock  exchange  tax.  In  all  these  cases  separation  of 
state  and  local  revenues  means  centralization  of  administration. 
The  one  goes  hand  in  hand  with  the  other. 

So  far  as  the  general  property  tax,  or  even  the  tax  on  real 
estate,  is  concerned,  it  is  undoubtedly  true  that  considerable 
progress  has  been  made  in  those  states  which  have  succeeded  in 
securing  an  effective  state  control  over  local  assessments.  But 
the  inherent  defects  of  the  general  property  tax  as  the  chief 
source  of  public  revenue  are  such  that  no  complete  cure  can  be 
hoped  for  through  mere  centralization  of  administration.  Even 
were  this  not  true,  however,  the  relegation  of  the  general  prop- 
erty tax  to  the  local  divisions  would  not  in  any  way  conflict  with 
the  principle  of  effective  central  control  over  local  assessments.^ 
Separation  of  source  is  one  thing;  control  of  administration 
is  quite  another  thing.  The  warmest  advocates  of  a  more 
efficient  administration  through  centralization  are  not  in  any 
way  precluded  from  lending  their  support  to  the  policy  of  sepa- 
ration.   Let  us  not  confuse  things  so  essentially  disparate. 

IV.  The  History  of  Separation 

We  come  finally  to  the  history  of  the  separation  of  state  and 
local  revenues. 

The  separation  of  state  and  local  revenues  in  the  sense  of  a 
provision  for  independent  state  taxes  was  recommended  as  early 
as  1879  by  the  state  assessors  of  New  York.  The  recommenda- 
tion was  worked  out  by  the  tax  commission  of  1881,  created  for 
that  purpose,  and  was  renewed  by  the  comptroller  in  1886, 
in  a  special  report  on  salaries,  taxation  and  revenue.  The  sug- 
gestion was  further  elaborated  by  the  revenue  commission  of 

*  In  New  Jersey,  for  instance,  these  two  things  have  gone  hand  in  hand. 
See  J.  M.  Mathews,  "Tax  Administration  in  New  Jersey,"  in  The  Journal 
of  Political  Economy,  vol,  20  (1912),  p.  736. 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES  369 

Illinois  in  1886  and  by  the  Maryland  tax  commission  in  1888. 
From  that  time  on,  however,  we  find  comparatively  little  atten- 
tion paid  to  the  project,  until  the  present  writer  took  the  matter 
up  during  the  next  decade.  With  the  new  century  the  discus- 
sion became  more  active.^ 

In  practice,  moreover,  some  progress  is  to  be  noted.  In  many 
states  a  beginning  had  been  made  by  securing  for  state  purposes 
a  supplementary  revenue  over  and  above  that  from  the  general 
property  tax.  But  this  partial  achievement  secured  few  of  the 
advantages  of  real  separation  except  possibly  that  of  a  moderate 
reduction  in  the  tax  rate.  In  a  few  states,  as  in  West  Virginia, 
during  the  past  few  years,  more  progress  has  been  made  by 
cutting  down  the  state  tax  on  general  property  to  a  minimum, 
and  thus  achieving  what  the  tax-commissioner  calls  a  ''practical 
realization  of  separation."  Again,  in  a  few  of  the  smaller  eastern 
states,  like  New  Jersey,  Connecticut  and  Delaware,  where  the 
commonwealth  expenses  were  relatively  slight,  it  was  found 
practicable  to  defray  them  almost  entirely  from  taxes  on  corpo- 
rations. In  New  Jersey,  however,  the  school  taxes  are  dis- 
tributed by  the  state,  90%  going  back  to  the  county  where 
they  are  raised,  10%  going  to  the  state  schools  and  to  the  poorer 
counties.  Moreover,  the  railroad  tax  revenue  so  far  as  it  is  not 
reserved  to  the  state  is  distributed  according  to  county  valua- 
tions. The  chief  example  of  separation  has  now  for  many 
decades  been  Pennsylvania,  where  the  system,  however,  devel- 
oped so  gradually  as  never  to  attract  much  attention.  In 
Pennsylvania  real  estate  is  not  taxed  at  all  for  state  purposes, 
nor  is  personal  property,  whether  of  individuals  or  of  corpora- 
tions taxed  for  local  purposes.  The  state  revenue  is  independent 
of  the  local  revenue.  Apart  from  Pennsylvania,  New  York  was 
until  recently  the  leading  example  of  separation  of  state  and 
local  revenues,  although  from  the  local  point  of  view  the  separa- 
tion was  not  complete  because  corporations  were,  and  still  are, 
subject  to  the  general  property  tax  for  local  purposes.  So  far, 
however,  as  the  chief  point  is  concerned,  namely,  the  abandon- 
ment of  the  general  property  tax  for  state  purposes,  New  York 
for  a  time,  in  practice  reached  the  separation  of  state  and  local 
revenues. 

The  creation  of  an  additional  and  independent  source  of  state 

*  Cf.  D.  C.  Westenhaver,  of  Martinsburg,  W.  Va.,  The  Separation  of 
State  and  Local  Revenues.  A  paper  read  at  the  National  Conference  on  Taxa- 
tion, held  in  Buffalo,  May,  1901 ;  and  separately  published. 


I 


,  1 


t 


370 


ESSAYS  IN  TAXATION 


revenue  oyer  and  above  that  from  the  general  property  t^^x 

not  until  the  early  nineties  that  the  author  was  fortunate  enough 
in  impressing  upon  the  authorities  the  importance  of  a  system 
of  more  complete  separation.  Ever  since  that  time  the  process 
went  slowly  forward,  until  in  1906  the  final  step  wa^  taken  and 
provision  was  made  for  securing  the  entire  state  revenue— be- 
tween thirty  and  forty  millions  of  dollars-from  other  sources 
than  the  general  property  tax.  The  separation,  however,  was 
not  enforced  by  any  specific  law;  it  was  simply  the  result  of  an 
annual  legislative  decision.^ 

Had  conditions  remained  normal,  it  is  not  unlikely  that  the 
practice  would  have  received  permanent  legal  sanction.    A  few 
years,  however,  after  separation  had  been  introduced,  there 
came  an  extraordinary  and  prodigious  increase  in  the  state  debt 
which  for  some  years  had  stood  at  a  little  under  ten  million  dol- 
lars.     1  he  contemplated  improvement  of  the  Erie  canal  called  for 
an  outlay  of  over  a  hundred  million  dollars,  and  the  new  scheme 
ot  improved  state  highways,  with  contributions  to  the  towns 
anr  counties,  was  made  possible  by  an  additional  loan  of  fifty 
millions     It  was  this  fact  and  not  any  extravagance  in  general 
expenditures,  as  has  sometimes  been  claimed,  that  was  respon- 
sible  for  the  inadequacy  of  the  customary  revenues.    For  the 
ordmaiy  revenues,  exclusive  of  any  direct  tax,  just  about  kept 
pace  with  the  expenditures  exclusive  of  those  connected  with 
the  new  canal  and  improved  highway  funds.^    The  interest 
and  amortization  charges  on  this  new  and  huge  debt  had  now  to 
be  met  out  of  the  annual  appropriations,  and  the  sudden  increase 

» The  separation  was  never  technically  complete.    Even  from  1906  to 
IJll  an  msigmficant  direct  tax  on  property  was  levied  to  meet  the  expenses 

S-^^Tn  lolrr^^'"^-  J^'t  '""  "^"^^  ^--  ^218,000  inT^  to 
ih^rT  /•      .   ""f  ^'""^  '"'  however,  levied  by  judicial  districts  and 

the  rate  depends  entirely  upon  the  amount  needed  by  that  district     Ex- 

^th  tuntVr  'Y  •'''  fr^''-^"^^  ^'  '''"^'^  districts^  not  coteminous 
uith  county  boundaries,  the  tax  is  the  equivalent  of  a  county  tajc.    In 
most  states  m  fact,  these  expenses  axe  paid  by  counties. 
This  IS  clear  from  the  following  table: 


1905 
1911 


Receipts  from  otheb 
than  the  so-called 
DiBECT  Tax 


ExPENDirtTRES,  EXCLTTSIVB 

OF  THE  Canal  and  High- 
way Funds 


$23,813,959  $24,511,947 

^^'"^^^Ml  34,129,638 

pp.  mZd  m'''  '^  ^^'  (Comptroller  of  the  State  of  New  York,  Albany,  1912, 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES     371 


of  expenditure  disarranged  the  whole  fiscal  scheme.  This  event- 
uality had  been  foreseen  by  the  Special  Tax  Commission  of  1907, 
of  which  the  author  was  a  member,  and  a  plea  had  then  been 
made  for  the  provision  for  some  elasticity  in  the  budget.  The 
plea,  however,  was  unheeded  because  the  danger  seemed  to  be 
remote  and  because  there  still  was  a  substantial  surplus  in  the 
treasury.  When,  now,  in  1911  the  legislature  was  confronted 
by  this  fiscal  emergency  of  largely  increased  expenditures  for 
debt  service,  without  any  additional  revenues  to  meet  them,  the 
simplest  way  out  of  the  difficulty  seemed  to  be  a  return  to  the 
so-called  direct  tax,  based  on  the  old  apportionment  according 
to  assessed  valuations  of  property.  Accordingly  in  1911,  after 
the  lapse  of  five  years,  the  old  system  was  again  put  into  force, 
and  a  direct  property  tax  of  over  six  millions  was  imposed,  in- 
creased in  1912  to  meet  the  increased  sinking  fund  requirements 
to  over  ten  millions.  In  the  same  way,  the  lack  of  any  provision 
for  elasticity  led  Connecticut,  which  had  abandoned  the  direct 
property  tax  for  state  purposes  in  1890,  to  reintroduce  it,  al- 
though at  a  low  rate,  in  1911.  The  responsible  factor,  however, 
in  Connecticut  was  not  so  much  the  appearance  of  a  sudden 
emergency  as  the  disinclination  of  the  important  interests 
affected  to  accede  to  any  increase  of  the  specific  taxes. 

On  the  other  hand,  what  had  for  the  time  been  accomplished 
by  custom  in  New  York  and  Connecticut  was  brought  about  by 
law  in  California  in  1910-11.  California  had  long  suffered  from 
the  evils  of  the  old  system  and  had  become  restive.  Largely  un- 
der the  inspiration  of  Professor  Plehn,  of  the  University  of  Cali- 
fornia, the  state  tax  commission  recommended  the  adoption  of 
the  policy  of  separation  in  its  reports  of  1905  and  1906.  After 
an  unsuccessful  attempt  in  1908,  the  plan  was  finally  authorized 
by  constitutional  amendment  in  1910  and  put  into  force  by 
the  statute  of  1911.  According  to  the  new  California  system 
the  state  now  taxes  all  corporate  franchises,^  all  banks  (except  on 
their  real  estate),  and  all  so-called  public  utilities  such  as  railroad, 
express,  telegraph,  telephone,  gas  and  electric  companies,  the 
property  of  which  used  for  operative  purposes  is  withdrawn  from 
local  taxation.  These  new  taxes,  together  with  the  inheritance 
tax  and  the  poll  tax  were  designed  to  meet  all  the  state  expenses 
and  to  render  possible  the  abolition  of  the  state  general  prop- 
erty tax.  This  result  was  actually  accomplished  in  1911  amid 
general  satisfaction  on  the  part  of  the  localities  as  well  as  of  the 
*  As  to  the  meaning  of  "franchises"  see  supra,  p.  226. 


Il 


?>72 


ESSAYS  IN   TAXATION 


state  government.*  It  is  hoped  that  this  will  continue  to  be 
the  case  in  the  future.  Whether  this  hope  will  be  reahzed  re- 
mains to  be  seen.  Judging,  however,  from  the  experience  of 
New  York  and  Connecticut,  there  is  grave  danger  that,  unless 
the  system  is  rounded  out  by  some  method  designed  to  secure 
elasticity,  separation  will  not  have  been  permanently  achieved. 
At  all  events,  the  example  of  California  is  important  as  indicat- 
ing the  trend  of  public  opinion  in  the  United  States. 

V.  The  Outcome 

There  remains  a  word  to  be  said  about  the  ultimate  outcome 
of  the  process  of  which  the  separation  of  state  and  local  revenue 
is  only  the  first  step.  To  discuss  this  as  it  deserves  to  be 
discussed  would  need  a  separate  chapter.  All  that  I  shall  here 
attempt  is  to  give  a  faint  indication  of  the  probable  develop- 
ment. 

In  a  primitive  democratic  community,  the  simplest  way  to 
reach  the  taxable  ability  of  the  individual  is,  as  we  have  seen,^ 
through  his  property.  The  general  property  tax  is  a  satisfactory 
index  of  relative  taxable  faculty  because  the  property  is  homoge- 
neous. To  tax  the  individual  and  to  tax  the  property  of  the 
individual  is  virtually  the  same  thing.  But  in  modern  times 
property  is  no  longer  homogeneous.  With  the  development 
of  commerce  and  industry  on  a  vast  scale,  property  splits  up 
into  all  sorts  of  forms  and  the  old  homogeneity  disappears. 
It  becomes  practically  impossible  to  reach  all  forms  of  property 
equally.  But  as  soon  as  it  becomes  in  practice,  as  is  the  case 
everywhere,  an  uneven  tax,  the  social  consequences  of  taxation 
make  themselves  felt.  The  taxation  of  certain  kinds  of  prop- 
erty is  no  longer  the  taxation  of  the  individual  who  owns  the 
property.  He  may  pay  the  tax,  but  he  no  longer  bears  the  tax. 
The  vast  economic  forces  which  affect  the  property  relations  of 
class  to  class  make  themselves  felt.  Some  taxes  are  shifted 
onward  to  other  classes,  and  are,  perhaps,  ultimately  diffused 
throughout  the  community.  Some  taxes  are  shifted  backward 
to  the  original  owner  and  through  the  process  of  capitalization 
are  discounted  by  the  new  purchaser  of  the  property.  Thus, 
while  some  taxes  remain  on  the  owner,  others  finally  disappear 

*  Cf.  the  Special  Report  on  Taxation  showing  the  first  Effects  of  Separatum 
on  State,  County  and  Municipal  Revenue  and  Taxation.    Sacramento,  1911. 
2  Supra,  chap.  ii. 


THE  SEPARA  TION  OF  ST  A  TE  AND  LOCAL  REVENUES    373 

entirely  as  a  burden  through  a  process  of  diffusion  or  absorp- 
tion. A  tax  on  mortgages,  as  is  now  well  understood,  does  not 
remain  on  the  lender  of  the  money,  but  is  shifted  to  the  borrower, 
and  where  the  borrower  is  a  building  operator,  it  affects  the 
dwellings  and  ultimately  the  rentals  with  various  incidental 
consequences  all  the  way  along.  A  tax  on  city  lands  is  not 
borne  by  the  man  who  has  purchased  the  land  after  the  tax  is 
imposed,  because  he  makes  allowance  for  the  tax  in  the  purchase 
price  of  the  land.  The  same  is  true  of  the  purchaser  of  cor- 
porate or  government  bonds.  A  tax  on  the  stock-in-trade  of 
a  merchant  or  factory-owner,  if  predictable  and  applied  to  all 
the  members  of  a  class,  results  in  an  increased  price  of  that 
commodity  to  the  consumer.  No  constitutional  provision  can 
be  of  avail  against  the  overpowering  force  of  economic  pres- 
sure. We  may,  like  Cnut,  order  the  waves  to  recede,  but  they 
will  not  recede.  The  constitutional  provision  in  most  of  our 
states,  that  all  property  should  be  taxed  alike,  has  outlived 
its  usefulness.  We  cannot  tax  all  property  alike,  because  it  is 
humanly  impossible  under  modern  conditions  to  reach  all 
property  alike;  and  if  we  do  reach  all  property  aUke,  the 
modern  social  effects  of  taxation  are  such  that  we  should  not 
be  putting  an  equal  burden  upon  the  property  owners  because 
we  should  then  be  hitting  the  wrong  man.  Until  we  rec- 
ognize the  fact  that  under  modern  conditions  to  tax  the  prop- 
erty is  not,  in  many  cases,  to  reach  the  owner  of  the  property, 
no  solution  of  the  problem  can  be  attained. 

The  separation  of  state  and  local  revenue  is,  therefore,  of 
importance  because  it  will  allow  every  community  to  ap- 
proach the  problem  in  an  unbiased  way,  and  will  enable  it 
to  select  those  classes  of  property  which  could  profitably  be 
relinquished.  It  means  practically  that  those  communities 
which  choose  to  abandon  the  personal  methods  of  taxation 
and  to  substitute  an  impersonal  taxation  may  be  permitted  to 

do  so. 

From  this  point  of  view  it  is  therefore  quite  correct  to  say 
that  the  importance  of  separation  lies,  so  far  as  local  commu- 
nities are  concerned,  in  the  freedom  of  exemption  rather  than 
in  the  freedom  of  taxation.  The  paramount  problem  of  Ameri- 
can public  finance  at  present  is  the  taxation  of  personal  prop- 
erty, and  all  careful  thinkers  are  agreed  that  personalty  cannot 
be  successfully  reached  by  the  localities.  Whatever  the  future 
may  have  in  store  as  to  the  possibility  of  reaching  personalty 


374 


ESSAYS  IN  TAXATION 


m 


, 


IIH 


through  exclusive  state  taxes  or  by  substitutes  for  the  per- 
sonal^  property  tax  or  by  federal  taxes,  the  line  of  least  resist- 
ance in  the  effort  to  get  rid  of  the  obnoxious  tax  on  personalty 
IS  through  the  freedom  that  may  be  granted  to  certain  local- 
ities to  make  experiments  in  this  direction.     The  mere  fact 
that  freedom  of  exemption  may  go  farther  than  this  and  possibly 
lead  to  the  exemption  of  improvements  as  well,  or  the  so-called 
local  single  tax,  .ought  not  to  terrify  us.    As  we  have  seen  else- 
where ^  the  exemption  of  improvements  in  local  taxation  is  on 
the  whole  undesiral)le.    But  that  is  after  all  a  matter  of  rela- 
tively minor  importance  compared  with  the  iniquity  of  the 
present  methods  of  the  general  property  tax.     The  extent  to 
which  exemption  ought  to  go,  moreover,  may  well  be  regulated 
by  state  law,  and  thus  the  dangers  of  complete  local  option 
be  avoided.'-    But  there  is  surely  no  reason  why  certain  local- 
ities should  not,  if  they  so  choose,  experiment  with  the  exemp- 
tion of  personal  property.     Where  the  general  property  tax 
is  utilized  only  for  local  purposes,  it  uill  be  far  easier  to  ac- 
complish the  result  than  where  it  is  used  also  for  state  revenues. 
This  conclusion  is  confirmed  by  the  history  of  the  reform  iii 
England.     Had  the  local  rates  also  been  utiHzed  for  general 
state  purposes  it  is  not  likely  that  personal  property  would 
have  been  so  readily  exempted  in  1840.     Separation  of  state 
and  local  revenue  would  put  us  in  the  position  which  has  been 
attained  by  England  for  almost  three-quarters  of  a  century. 
But  if  the  separation  of  state  and  local  revenues  should  lead 
to  the  local  exemption  of  personal  property,  two  questions 
that   will   naturally   present  themselves  are:   first,   how   will 
great  wealth  be  made  to  bear  its  share;  and  second,  how  is 
the  burden  on  the  farmer  to  be  lightened. 

As  to  the  first  point,  it  may  perhaps  be  queried  whether  a 
better  way  of  reaching  great  wealth  is  not  by  curtailing  the 
special  privileges  which  so  often  make  great  wealth  possible. 
Without,  however,  developing  this  point  here,  it  may  be  affirmed 
that  if  we  desire  to  reach  the  results  rather  than  the  sources 
of  great  wealth,  a  method  stands  ready  at  hand.  By  developing 
the  inheritance  tax  we  shall  accomplish  the  advantages  of  a 
personal  taxation  without  its  drawbacks.    Moreover  the  devel- 

^  Suprn,  pp.  93-95. 

»  So  in  Germany,  under  the  laws  of  1893-5  the  local  communities  have  a 
rather  wide  latitude,  within  broad  lines  laid  down  by  state  law,  as  to  the 
choice  of  local  revenues.    Cf.  infra,  p.  xvii,  sec.  iv. 


THE  SEPARATION  OF  STATE  AND  LOCAL  REVENUES    375 


opment  of  an  income  tax  assessed  by  state  officials  according 
to  a  general  scheme  might  be  expected  to  work  more  success- 
fully than  the  discredited  personal  property  tax,  administered 
by  local  officials.  With  the  corporation  tax,  the  inheritance 
tax  and  the  income  tax  we  shall  go  far  toward  reaching  the 
main  elements  of  modern  fortunes.  The  difficulties  here, 
indeed,  arising  from  the  conflicts  of  state  jurisdiction  are  great, 
but  not  insuperable.  They  will  be  overcomQ  either  by  the 
development  of  a  system  of  interstate  comity,  or  perhaps  by  a 
further  application  of  the  principle  of  division  of  yield,  whereby 
the  taxes  will  be  assessed  in  first  instance  on  a  uniform  basis 
by  the  federal  government  and  then  apportioned  according  to 
constitutional  methods  among  the  states.^ 

The  second  problem  is  that  of  the  farmer.  If  the  local  tax 
is  primarily  on  real  estate,  and  if,  as  frequently  happens,  the 
conditions  of  production  are  such  that  the  farmer  is  unable  to 
shift  the  burden  of  the  tax  to  the  consumer,  what  can  be  done? 
Here  a  double  avenue  of  escape  is  open.  In  the  first  place, 
many  of  the  expenditures  of  local  communities  ought  to  be 
defrayed  by  the  state  government.  Even  now,  in  several  of  our 
commonwealths,  state  roads  are  being  constructed  throughout 
the  local  divisions  because  transportation  is  bemg  recognized 
as  affecting  the  interests  of  the  whole  state.  But  if  certain 
roads  ought  to  be  state  roads,  and  constructed  at  state  expense, 
why  should  not  certain  schools  be  state  schools  and  conducted 
at  state  expense?  Education,  like  transportation,  is  more  than 
a  merely  local  matter. 

In  the  second  place,  while  the  expenditure  side  may  be  cut 
down  in  this  way,  the  revenue  side  may  be  augmented  by  an 
application  of  the  principle  of  the  division  of  yield  whereby 
the  overplus  of  certain  taxes  like  the  state  excise  tax  or  the 
corporation  tax  or  the  inheritance  tax  or  even  the  possible 
state  income  tax  of  the  future  is  distributed  among  the  localities. 
Thus  the  burden  on  the  local  real  estate  will  be  decreased  rather 
than  augmented.  Under  the  present  system  the  farmer  pays 
not  only  his  own  taxes,  but  in  large  part  the  taxes  of  the  rich 
men  of  the  rest  of  the  state.  Under  the  new  system  of  separa- 
tion of  state  and  local  revenue,  carried  to  its  logical  conclu- 
sion, the  farmer  will  pay  less  and  get  more;  and  what  is  true 
of  the  farmer  is  true  of  other  classes.    The  tax  burden  will 


^  Cf.  infra,  chapters  xii.  and  xxi. 


376 


ESSAYS  IN  TAXATION 


Let  us  remember,  in  conclusion,  that  the  real  meaning  of  the 
separation  of  revenues  is  the  separation  of  state  revenues  rom 
dependence  on  the  local  ..venues.  It  does  not  meai.  he  sep^ 
ton  of  ocal  revenues  from  dependence  on  state  revenues 
Practically  it  means  that  state  revenues  should  not  be  derivS 
from  a  share  m  the  locally  assessed  property  tax:  it  does  S 

Share  of  the  state-assessed  corporation,  inheritance,  income  or 

tu -^Zth^'T^V' r'r''  '^  """^  thing/division  o? 
S  he  Tt!  ?f  ■  T  °?^^'*'^*'  Of  separation  is  the  liberation 
of  the  state  from  dependence  on  the  vagaries  and  inefKciencies 
ol  local  assessment  of  property. 

The  problems  of  taxation  in  the  United  States  are  becoming 
eveiy  year  more  complex.    In  order  to  solve  them  we  Zf 

&sTen"^Th  ',f  "?*'  T'-'  ""'^  ^  P^^P'^r*^  ^  take  the 
7^li,^^\  ultimate  goal  is  the  accommodation  of  fiscal 

methods  to  our  changed  economic  conditions.  One  of  the 
first  steps,  at  least,  is  the  separation  of  state  and  local  revenues.' 

■  The  chief  conclusions  of  this  chapter  are  now  confirmed  in  Mabel 
Newcomer  s  comprehensive  study  of  this  topic  referred  tTZrT  p^ 
Her  mvestigation  closes  in  the  foUowing  worfs:  "In  the  statS^wL  it^ 
been  mtroduced  thus  far  it  has  been  a  mark  of  progress  " 


CHAPTER  XII 

THE   RELATIONS   OF   STATE   AND   FEDERAL   FINANCE^ 

The  existence  of  several  concurrent  or  overlapping  tax  juris- 
dictions has  always  been  a  source  of  more  or  less  difficulty.  It 
is  especially,  however,  in  federal  states  that  the  problem  as- 
sumes its  most  acute  form,  and  it  is  primarily  in  recent  years 
that  the  complications  have  been  vastly  increased  by  the  new 
developments  of  economic  hfe.  The  problem  is  not  peculiar 
to  the  United  States,  for  the  relations  of  local  and  imperial 
finance  have  long  agitated  the  minds  and  taxed  the  abilities  of 
British  statesmen;  while  in  federal  states  like  Germany,  Swit- 
zerland, Canada  and  AustraUa  we  have,  as  in  the  United 
States,  the  three-fold  complications  of  local,  state  and  federal 
fiscal  adjustments.  The  problems  are,  with  slight  variations, 
everywhere  analogous. 

In  the  United  States  it  is  only  of  late  that  the  difficulties 
have  presented  themselves  in  full  force.  Local  expenditures 
were  at  first  of  slight  importance;  state  revenues  were  derived 
from  tacking  on  an  addition  to  the  well-nigh  sole  source  of 
local  revenue — the  general  property  tax;  federal  revenues 
were  by  constitutional  arrangement  and  well-settled  custom, 
restricted  as  a  rule  to  import  duties  and  to  a  few  categories  of 
internal-revenue  taxation. 

Of  late  years,  however,  a  three-fold  change  has  occurred.  In 
the  first  place,  the  growing  inadequacy  of  state  and  local  rev- 
enues has  led  to  the  selection  of  new  sources  of  income,  some 
of  which  were  also  occasionally  utilized  by  the  federal  govern- 
ment. Secondly,  the  vast  economic  changes,  which  have  broken 
down  state  hues  and  made  industry  national,  have  disclosed  to  a 
great  degree  the  inherent  weaknesses  of  certain  forms  of  state 
taxation,  and  have  led  to  the  demand  for  some  method  of  na- 
tional supervision  or  regulation  in  order  to  secure  uniformity. 
In  the  third  place,  the  well-nigh  complete  failure  of  the  general 

1  This  chapter  was  originally  published  in  the  Addresses  and  Proceedings 
of  the  Third  Conference  of  the  International  Tax  Association,  Columbus,  1910. 

377 


378 


ESSAYS  IN  TAXATION 


I 


property  tax  m  state  and  local  finance  and  the  growing  belief 
that  large  fortunes  are  evading  their  share  of  the  public  burdens 
have  engendered  a  widespread  demand  for  some  more  effect- 
ive method  of  reaching  the  wealthier  classes  of  the  community 
1  hese  three  causes  have  conspired  to  bring  the  subject  of  the 
relations  of  state  and  federal  finance  to  a  focus,  so  that  it  is 
now  m  the  forefront  of  popular  interest. 

It  behooves  us,  therefore,  to  give  careful  attention  to  this 
topic,  and  to  endeavor  to  ascertain  whether  there  do  not  exist 
some  underlying  principles  of  widespread  application  which 
may  serve  as  a  guide  to  the  legislator  and  the  administrator 
Looking  at  the  subject  in  its  largest  aspect,  it  may  be  stated 
that  there  are  at  least  three  general  considerations  which  must 
be  borne  in  mind,  in  the  attempt  to  make  a  permanent  choice  of 
revenues  for  each  of  the  competing  tax  jurisdictions.  These  are 
respectively  the  considerations  of  efficiency,  of  suitability  and  of 
adequacy.    Let  us  take  these  up  in  turn. 

I.  The  Pnnciples  of  Efficiency  and  Suitability 
The  problem  of  efficiency  in  taxation  is  naturally  of  vital  im- 
portance.   No  matter  how  well-intentioned  a  scheme  may  be 
or  how  completely  it  may  harmonize  with  the  abstract  principles 
of  justice,  if  the  tax  does  not  work  administratively,  it  is  doomed 
to  failure.    It  is  clear  that  the  effectiveness  of  different  taxes 
depends  upon  the  nature  of  the  tax,  as  well  as  upon  the  character 
of  the  administration.    A  tax  on  land,  for  instance,  is  apt  to  be 
best  administered  by  local  authorities;  for  it  is,  after  all,  the 
ocal  assessors  who  may  be  presumed  to  possess  the  most  exact 
knowledge  of  the  local  conditions  upon  which  the  value  of  the 
land  depends.    State  supervision  may,  indeed,  be  desirable  for 
certain  purposes,  but  into  that  question  we  do  not  propose  here 
to  eriter.    In  the  main,  a  locally  administered  land  tax  will  be 
relatively  efficient. 

Other  taxes  are  less  obviously  local  in  character  or  are  less 
well  htted  for  local  assessment  because  of  administrative  diffi- 
culties. A  good  example,  for  instance,  is  to  be  found  in  the 
liquor-hcense  tax  known  in  New  York  as  the  Excise  Tax  When 
the  assessment  of  the  tax  was  transferred  a  few  years  ago  from 
local  to  state  officials,  the  effectiveness  of  the  administration 
was  so  enhanced  as  vastly  to  increase  the  revenue  The  ad- 
ministration was  removed  from  local  politics,  but  was  not 
plunged  into  state  politics.     Centralization  of  administration 


THE  RELATIONS  OF  STATE  AND  FEDERAL  FINANCE    379 

here,  as  in  many  other  domains  of  political  life,  has  been  found 
to  approve  itself  to  the  popular  mind. 

Just  as  the  state  administered  revenues  have  been  found  in 
some  cases  to  be  superior  to  locally  administered  revenues,  it 
may  be  expected  that  federally  administered  revenues  will  in 
some  cases  be  superior  to  state  administered  revenues.  For 
not  only  is  the  federal  administration  in  some  respects  superior 
in  efficiency  to  that  of  the  state,  but  the  very  character  of  the 
tax  may  render  effective  supervision  far  easier  in  the  one  case 
than  in  the  other.  The  administration  of  the  income  tax,  for 
instance,  would  undoubtedly  be  far  more  effective  in  the  hands 
of  the  federal  government  than  in  those  of  the  state  government 
because  of  the  difficulty,  as  we  shall  see,  of  localizing  and  ade- 
quately controlling  incomes.  Other  instances  of  this  distinction 
between  administrative  efficiency  and  inefficiency  might  readily 
be  multipUed. 

The  second  consideration  is  that  of  suitability.  Are  there 
any  sources  of  revenue  which  are  naturally  more  suitable  for 
utiUzation  by  one  tax  jurisdiction  rather  than  another?  This 
is  really  a  problem  as  to  the  basis  of  taxation.  Is  the  basis  of  a 
given  tax  wide  or  narrow?  Obviously,  in  proportion  as  the  basis 
of  a  tax  is  more  and  more  extended,  the  argument  in  favor  of  its 
utilization  by  the  broader  tax  jurisdiction  becomes  correspond- 
ingly strong.  Thus,  one  of  the  principal  reasons,  in  addition  to 
that  previously  mentioned,  why  the  tax  on  real  estate  is  not 
employed  by  the  central  government,  is  because  the  basis  is  so 
narrow  a  one.  It  is  chiefly  because  the  tax  on  real  estate  is 
unsuitable  for  the  general  revenue  system  that  it  is  everywhere 
becoming  more  and  more  relegated  to  the  local  jurisdictions. 
This  tendency  is  universal  throughout  the  civilized  world,  and 
the  seeming  counter  tendencies  which  are  illustrated  by  some 
of  the  proposals  in  the  new  British  budget  could  easily  l3e 
explained  away  for  entirely  different  reasons.  So  far  as  the  re- 
lations between  state  and  federal  finance,  at  all  events,  are  con- 
cerned, there  is  no  doubt  that  a  tax  on  real  estate  is  obviously 
unfitted  for  the  federal  government.  We  in  the  United  States 
have  had  but  three  instances  of  such  a  tax,  of  an  entirely 
ephemeral  nature,  and  in  the  main  so  unsuccessful  that  its 
repetition  is  exceedingly  doubtful. 

While  real  estate,  with  its  narrow  basis,  stands  at  one  extreme 
of  the  scale,  we  find  at  the  other  extreme,  with  a  very  wide  basis, 
articles  of  general  consumption.    The  widest  possible  basis  is 


.  I 


380 


ESSAYS  IN  TAXATION 


Ml 


afforded  by  commodities  of  so-called  mass  consumption,  like 
tobacco  and  spirituous  beverages;  and  we  accordingly  find  that 
in  the  United  States,  as  everywhere  else,  taxes  on  these  com- 
modities are  reserved  for  the  use  of  the  broadest  tax  jurisdiction. 
Almost  without  exception  the  American  states  have  voluntarily 
refrained  from  utilizing  this  source  of  revenue  because  of  the 
obvious  unsuitableness  of  taxes  on  consumption  for  state  pur- 
poses.    The  same  is  true  to  a  still  greater  extent  of  customs 
duties,  which  are  almost  everywhere  kept  for  national  or  federal 
use     So  strongly  were  these  conditions  of  suitability  present 
m  the  minds  of  our  forefathers,  that  the  American  Constitution 
not  only  expressly  reserves  the  employment  of  import  duties  to 
the  federal  government,  but  provides  in  effect  that  the  indirect 
taxes  should  be  uniform  throughout  the  country.    It  is  clear  that 
this  desirable  uniformity  would  be  completely  lost  if  the  sepa- 
rate states  were  to  arrogate  to  themselves  this  important  source 
of  revenue. 

The  problem  of  suitability,  however,  with  its  considerations 
of  wide  versus  narrow  basis,  has  become  of  special  importance 
to  us  m  connection  with  three  great  classes  of  revenue,— the 
corporation  tax,  the  inheritance  tax  and  the  income  tax.     In 
each  of  these  cases  various  reasons,  as  we  shall  see,  have  con- 
spired to  put  them  forward  as  desirable  constituents  of  a  federal 
tax  system;  but  it  is  beyond  question  that  one  of  the  controlling 
factors  in  this  demand  is  the  proven  unsuitability,  from  some 
essential  points  of  view  at  least,  of  these  taxes  for  state  purposes. 
This  is  due,  above  all,  to  the  existence  of  interstate  complica- 
tions and  to  the  fact  that  the  economic  basis  of  each  of  these 
three  taxes  is  a  wide  one,  while  the  state  admmistrative  basis  is 
a  narrow  one. 

With  reference  to  corporations,  this  statement  scarcely  needs 
any  further  proof.  There  are,  indeed,  still  to  be  found  many 
small  businesses  in  corporate  form  supplying  primarily  local 
needs.  But  the  striking  characteristic  of  modem  business  life  is 
the  existence  of  corporations  whose  products  are  consumed 
throughout  the  country  and  whose  very  location,  as  in  the  case  of 
the  transportation  companies,  is  interstate  in  character.  From 
the  economic  point  of  view,  interstate  lines  have  been  com- 
pletely broken  down,  and  the  attempt  to  elaborate  a  successful 
system  of  state  taxes  on  corporations  has  been  frustrated  in 
large  measure  by  the  existence  of  these  interstate  complications 
It  IS  well  known,  for  instance,  that  the  national  tax  on  cor- 


THE  RELATIONS  OF  STATE  AND  FEDERAL  FINANCE  381 

porations  of  1909  was  due  almost  exclusively  to  the  endeavor 
to  secure  an  adequate  and  uniform  administrative  supervision 
of  corporations.  As  a  purely  fiscal  measure,  the  new  tax  is  open 
to  almost  every  conceivable  objection.  It  is,  for  instance, 
repugnant  to  the  principles  of  accounting,  because  it  deducts 
taxes  before  arriving  at  taxable  net  earnings,  a  proceeding  as 
little  justifiable  as  would  be  a  state  tax  on  corporations  which 
deducted  from  the  taxable  basis  the  locally  assessable  taxes, 
or  vice  versa.  It  is  repugnant  to  the  principles  of  justice  in 
taxation  in  that  it  provides  for  the  deduction  of  sums  payable 
as  interest  on  bonded  indebtedness.  This  practically  means 
that  the  tax  is  a  tax  only  on  the  stockholder  and  not  on  the 
bondholder.  Why  the  man  who  invests  $10,000  in  railroad 
stock  should  pay  taxes,  and  another,  who  invests  $10,000  in 
bonds,  should  go  scot-free,  has  never  yet  been  shown.  The  old 
argument  that  the  bond  represents  indebtedness,  while  the  stock 
represents  property,  is,  as  we  know,^  of  little  economic  weight. 
It  is  a  legal  and  not  an  economic  consideration.  If  the  real  in- 
tent of  the  tax  was  to  reach  the  people  who  owned  the  property, 
there  would  be  no  justification  in  taxing  only  the  class  of 
property  owners  known  as  stockholders. 

Finally,  thirdly,  even  if  the  intent  is  to  reach  only  the  stock- 
holders, the  corporation  tax  is  repugnant  to  sound  principles  of 
finance.  For,  as  is  familiar  to  all  students,  a  special  tax  on  a 
particular  class  of  capital  invested  in  corporations  will  lead  to  a 
so-called  amortization  of  the  tax;  that  is,  the  market  value  of 
the  corporate  shares  will  fall  by  an  amount  equivalent  to  the 
capitalized  value  of  the  tax,  so  that  the  future  purchaser  of  cor- 
porate shares  will  have  bought  them  free  of  the  tax,  discounting 
future  taxes  in  the  lower  purchase  price  of  the  security.  Thus 
the  burden  of  the  corporation  tax  will  ])e  borne  by  present  stock- 
holders, leaving  future  stockholders  free. 

From  all  these  points  of  view,  therefore,  the  federal  corpora- 
tion tax  might  be  declared  to  be  violative  of  sound  economic  and 
fiscal  principles.  Nevertheless,  all  these  objections  are  beside 
the  mark,  because  the  real  intent  of  the  tax  is  not  fiscal,  but 
social  or  regulative.  It  was  because  of  the  failure  of  the  states 
adequately  to  regulate  interstate  corporations  that  this  tax  was 
devised.  As  a  revenue  producer,  or  even  as  a  fiscal  measure,  it 
must  be  pronounced  inadequate;  but  as  a  regulative  measure 
it  is  pregnant   of  the  most   far-reacliing,   beneficial   results. 

1  Sujjra,  pp.  106-107. 


382 


ESSAYS  IN  TAXATION 


Whether  a  satisfactory  scheme  of  regulating  large  corporations 
can  be  attained  through  a  purely  fiscal  measure  may  well  be 
doubted.    But  since  taxation  can  be,  and  often  has  been,  utilized 
for  social  and  regulative  purposes,  it  may  be  expected  that  the 
regulative  side  of  the  corporation  tax  will  serve  as  an  entering- 
wedge  to  a  more  effective  system.     Thus  the  national  cor- 
poration tax  is  a  natural,  and  in  principle  on  the  whole  a  not 
undesirable,  consequence  of  existing  interstate  complications. 
In  the  same  way  the  demand  for  a  federal  inheritance  tax  is 
in  large  measure  the  result  of  interstate  conflicts  of  tax  juris- 
diction.    Anyone  who  has  taken  the  trouble  to  follow  with  care 
the  working  of  the  inheritance  tax  in  our  foremost  common- 
wealths will  realize  that,  as  a  revenue  producer,  it  would  be  far 
more  successful  were  it  not  subject  to  the  difficulties  of  inter- 
state conflicts  of  tax  jurisdiction.     The  fact  that  the  English 
inheritance  tax  in  1909  yielded  about  twenty  times  as  much  as 
the  New  York  mheritance  tax  cannot  be  explained  simply  by  the 
difference  in  population  or  in  the  tax  rate.    It  is  in  large  measure 
due  to  the  fact  that  the  Englishman  cannot  evade  the  tax  as 
can  the  New  Yorker  by  transferring  himself  or  his  property  to 
adjacent  states,  where  no  such  tax  exists.    On  the  other  hand, 
there  have  been  in  America  frequent  instances  of  double  taxa- 
tion, as  in  the  well-known  case  of  the  estate  of  a  man  whose 
property  happens  to  be  situated  in  another  state  being  taxed 
by  each  state  in  turn.    Thus  the  state  assessment  of  inheritances 
means   now   undertaxation   and   now   overtaxation— the   net 
result  being  glaring  inequality.     From  this  point  of  view  a 
federal  inheritance  tax  would  be  as  superior  to  a  state  inherit- 
ance tax  as  the  latter  would  be  to  a  local  inheritance  tax. 

The  same  considerations,  but  in  an  intensified  form,  apply  to 
the  income  tax.  If  there  is  anything  that  may  be  considered  a 
well-settled  induction  from  experience,  it  is  that  an  income  tax 
is  more  and  more  unsuccessful  as  the  basis  of  the  tax  becomes 
narrower.  In  former  times  a  local  income  tax  was  fairly  work- 
able because  incomes  were  chiefly  local  in  their  nature.  In 
modem  times,  however,  the  income  of  the  taxpayer,  and  es- 
pecially the  income  of  the  large  taxpayer,  has  very  little  to  do 
with  the  locality  in  which  he  happens  to  live.  Nay,  more,  in- 
comes nowadays,  through  the  working  out  of  economic  forces, 
have  become  national  and  international  in  character,  and  at  all 
events  have  far  transcended  states  lines.  A  man  may  live  in  one 
state  and  may  secure  his  income  partly  from  real  estate  holdings 


THE  RELATIONS  OF  STATE  AND  FEDERAL  FINANCE  383 

situate  in  another  state  and  partly  from  investments  in  secu- 
rities of  corporations  whose  earnings  are  derived  in  many  other 
states.  It  is  not  easy  for  any  local  or  state  administration 
successfully  to  ascertain  or  adequately  to  control  such  income 
of  its  resident  citizens.  And  unless  some  alternative  method  of 
reaching  the  income  at  the  source  is  devised,  it  will  be  almost 
equally  difficult  for  a  state  or  a  local  community  to  control 
the  income  earned  within  its  borders  by  non-residents.  While 
these  difficulties  are  indeed  not  insuperable,  as  has  been  shown 
by  the  recent  experience  of  several  of  our  commonwealths,  it  is 
obvious  that  they  will  not  be  present  in  the  same  degree  if  the 
income  tax  is  levied  by  the  national  government.  A  federal 
income  tax  thus,  possesses  advantages  which  are  not  shared  by  a 
state  income  tax. 

It  will  be  seen,  therefore,  that  so  far  as  concerns  the  ques- 
tion of  suitability,  resting  on  the  existence  of  conflicts  of  tax 
jurisdiction,  the  arguments  in  favor  of  federal  corporation, 
inheritance  and  income  taxes  are  of  considerable  weight.  It 
would,  however,  be  rash  to  conclude  that  the  argument  is  con- 
vincing; for  there  still  remains  the  third  point,  adverted  to 
above,  without  a  careful  consideration  of  which  no  final  con- 
clusion can  be  reached.  We  come,  in  other  words,  to  the 
principle  of  adequacy  in  taxation. 

II.  The  Principle  of  Adequacy 

If  we  look  at  revenue  measures  from  the  point  of  view  of 
adequacy,  it  will  be  seen  that  the  problem  assumes  a  different 
form.    Let  us  apply  it  first  to  the  income  tax. 

So  far  as  considerations  of  revenue  are  concerned,  it  can 
scarcely  be  contested  that  the  income  tax  is  not  needed  for 
federal  purposes.^  Federal  revenues  in  the  past  have  in  normal 
times  been  derived  almost  entirely  from  customs  duties  and 
internal  indirect  taxes.  There  is  no  reason  why  these  sources 
should  not  suffice  for  the  future.  Without  entering  here  upon 
the  general  question  of  the  protective  tariff,  it  may  be  con- 
fidently asserted  that  we  can  continue  to  secure  a  large  and 
growing  revenue  from  import  duties,  whether  the  principle 
of  protection  be  upheld  in  its  integrity  or  not.  Either  a  revenue 
tariff  with  incidental  protection,  or  a  protective  tariff  with 

*  For  a  fuller  treatment  of  this- aspect  of  the  question  see  Seligman,  The 
Income  Tax,  1911,  pp.  631-658. 


IH 


a84 


ESSAYS  IN  TAXATION 


I 


incidental  revenue  can  be  made  to  yield  the  desired  income. 
And  when  we  consider  the  immense  population  in  the  United 
States,  it  is  beyond  all  question  that  even  a  simple  system  of 
indirect  taxes  will  suffice  to  raise  the  remainder  of  the  needed 
revenue.  The  internal  revenue,  exclusive  of  the  income  tax, 
yiekled  at  the  close  of  the  Civil  War  almost  $300,000,000  a  year, 
and  if  we  take  mto  account  the  prodigious  mcrease  in  wealth  and 
in  consumption  during  the  forty  years  that  have  elapsed,  it 
will  be  apparent  that  the  internal  revenue  system  of  the  United 
States  might  be  made  to  yield  to-day  many  hundred  millions 
of  dollars  more  than  it  actually  does,  ^v^thout  even  approaching 
the  number  of  taxes  or  the  rate  of  taxation  that  existed  durmg 
the  Civil  War.  It  seems  reasonable  to  believe  that  the  prospec- 
tive expenditure  of  the  United  States  may  be  readily  suppHed 
by  import  duties,  together  with  a  few  internal  revenue  taxes.^ 

A  national  income  tax,  therefore,  is  not  needed  for  revenue. 
The  argument  in  its  favor,  however,  is  none  the  less  strong. 
If  not  indeed  for  revenue,  it  is  needed  for  justice.  This  is  due 
to  the  complete  breakdown  of  the  general  property  tax  in  state 
and  local  finance.  Under  the  existing  state  and  local  systems 
there  is  no  doubt  that  we  are  unable  to  reach  the  possessors  of 
large  fortunes.  The  wealthy  man  stands  from  under,  chiefly 
because  the  loop-holes  in  the  general  property  tax  have  become 
so  numerous  that  any  adroit  individual  can  avail  hunself  of 
them.  A  federal  income  tax  is  justifiable  on  the  score  of  equity 
under  prevalent  American  conditions. 

I  would  here,  however,  sound  a  note  of  warning.  It  must 
not  be  imagined  that  a  federal  income  tax  would  at  once  work 
well.  The  experience  of  Germany  and  even  of  England  must 
not  lead  us  astray.  We  have  neither  the  administrative  ma- 
chinery of  Prussia  nor  the  methods  of  doing  business  which 
are  found  in  Great  Britain.  The  lump-sum  income  tax  of 
Prussia  would  be  difficult  in  this  country;  the  scheduled  in- 
come tax  of  Great  Britain  would  meet  with  ahnost  as  many 
difficulties  here.  It  has  taken  England  half  a  century  to  work 
out  the  problem  of  its  income  tax  and  to  make  it  fairly  suc- 
cessful; it  would  take  us,  perhaps,  almost  as  long  to  make 
even  a  federal  income  tax  a  complete  administrative  success. 

^  Note  to  9th  edition.  It  must  be  remembered  that  this  passage  was 
written  before  the  Great  War.  The  change  in  the  present  situation  is 
discussed  in  a  subsequent  chapter. 


THE  RELATIONS  OF  STATE  AND  FEDERAL  FINANCE    385 

Thus  those  who  hope  for  a  fiscal  or  a  social  panacea  in  the  federal 
income  tax  will  probably  be  much  disappointed.  Moreover, 
if  introduced  into  this  country,  it  must  be  framed  with  the 
most  extreme  care  and  on  Hues  far  different  from  the  measures 
of  1862  and  1894. 

One  final  advantage  of  the  federal  income  tax  which  must 
not  be  overlooked  is  that  it  would  render  far  easier  the  struggle 
that  is  going  on  in  our  various  states  to  amend  or  to  abolish  the 
iniquitous  personal  property  tax.  The  taxation  of  intangible 
personalty  has  become  a  byword  and  a  reproach  to  our  American 
public  life.  All  efforts  to  reform  the  system  of  the  general 
property  tax  have  thus  far  shattered  against  the  rock  of  popular 
conviction  that  such  wealth  as  consists  of  personal  property 
ought  not  to  be  allowed  to  escape.  If,  now,  we  were  to  have  a 
federal  income  tax,  however  unsuccessful  it  might  be  at  first, 
it  would  take  the  wind  out  of  the  sails  of  these  objectors;  and 
the  would-be  reformers  of  the  system  of  local  and  state  taxation 
would  no  longer  be  met  by  the  contention  that  personal  property 
must  be  listed  for  taxation.  For  personal  property  would  then 
be  reached  through  the  federal  income  tax.  It  is  significant  that 
in  England  personal  property  was  entirely  exempted  from  all 
local  taxation  in  the  very  same  decade  that  the  existing  national 
income  tax  was  imposed. 

Our  conclusion  would  then  be  that,  so  far  as  the  income  tax 
is  concerned,  even  though  it  be  not  needed  for  purposes  of 
revenue,  it  is  nevertheless  a  desirable  adjunct  to  our  scheme  of 
federal  taxation.  It  goes,  of  course,  without  saying,  that,  even 
apart  from  this  question,  the  projected  constitutional  move- 
ment, legalizing  the  income  tax,  ought  to  prevail.  For  even  if 
the  income  tax  were  not  to  constitute  a  part  of  our  normal  reve- 
nue system,  it  would  be  deplorable  in  the  extreme  if  a  mighty 
empire  like  the  United  States  were  unable  to  use  this  potent 
engine  of  revenue  in  time  of  need. 

When,  however,  we  come  to  consider  the  inheritance  tax  and 
the  corporation  tax,  we  find  that  the  argument  from  the  principle 
of  adequacy  is  somewhat  different.  The  income  tax  is  not 
at  present  needed  for  state  or  local  revenues,  but  the  situation 
may  before  long  become  the  same  as  in  the  case  of  the  inherit- 
ance tax  and  the  corporation  tax.  Every  one  who  is  familiar 
with  the  recent  developments  of  tax  reform  in  the  American 
states  knows  that  the  tendency  is  clear.  There  is  a  movement 
toward  the  separation  of  state  and  local  revenues,  with  a  reserva- 


386 


ESSAYS  IN  TAXATION 


'  j..  ii 


tion  of  the  real  estate  tax  to  the  localities.  On  the  reasons  for 
this  world-wide  movement  it  is  not  necessary  or  proper  here 
to  enter/  but  it  is  pertinent  to  call  attention  to  the  fact  that  the 
general  property  tax  is  coming  more  and  more  to  be  restricted 
to  the  localities,  and  that  the  state  governments  have  in  conse- 
quence been  compelled  to  reach  out  for  new  and  independent 
sources  of  revenue.  These  new  sources  of  revenue  have  consisted 
primarily  of  the  corporation  tax  and  the  inheritance  tax,  supple- 
mented in  a  few  case^  like  New  York  by  some  other  forms  of 
taxation.  In  some  states  this  process  has  been  entirely  com- 
pleted, and  the  general  property  tax  is  no  longer  employed  for 
state  purposes,  to  the  great  advantage  of  all  concerned.  If,  now, 
the  federal  government  would  seize  upon  either,  or,  still  worse, 
both  the  inheritance  tax  and  corporation  tax,  this  entire  salutary 
movement  would  have  to  be  reversed.  The  assumption  by  the 
federal  government  of  what  it  does  not  need  for  fiscal  purposes 
and  of  what  is  seriously  needed  by  the  state  government  would 
be  a  calamity  of  the  first  magnitude — a  calamity  the  full  signif- 
icance of  which  can  only  be  appreciated  by  those  who,  during 
the  past  few  decades,  have  patiently  watched  and  labored  to 
help  in  bringing  about  the  beginning  of  the  great  reform  which 
is  now  apparent.  The  abandonment  by  the  states  of  rehance 
on  the  aid  afforded  by  the  corporation  tax  and  the  inheritance 
tax  is  something  that  cannot  be  contemplated  for  a  moment. 

On  the  other  hand,  as  we  have  seen,  both  the  inheritance  tax 
and  the  corporation  tax,  like  the  income  tax,  are  really  more 
fitted  for  federal  administration.  How,  then,  are  we  to  escape 
these  two  horns  of  the  dilemma?  According  to  the  principle 
of  suitabiUty,  the  inheritance,  the  corporation  and  the  income 
taxes  should  be  federal  taxes;  according  to  the  principle  of  ade- 
quacy, the  first  two  should  be  in  whole  and  the  third  perhaps  in 
in  part  state  taxes. 

III.  The  Apportionment  of  Federal  Revenues 

It  is  permissible,  however,  to  suggest  a  method  which  will 
prevent  us  from  being  impaled  on  either  of  the  two  horns  of  the 
dilemma,  and  which  may  extricate  us  from  the  difficulty.  Why 
is  it  not  possible  to  secure  all  the  ends  of  suitability  by  having 
the  taxes  administered  by  the  federal  government  under  general 
federal  laws,  and  why  is  it  not  possible  to  secure  all  the  ends 

*  Cf.  supra,  chap.  xi. 


THE  RELATIONS  OF  STATE  AND  FEDERAL  FINANCE    387 

of  adequacy  by  having  the  proceeds  apportioned  in  whole  or  in 
part  to  the  various  states?  This  is  my  solution  of  the  diflSculty : 
let  the  federal  government  assess  the  taxes,  and  let  the  state 
governments  profit  by  the  taxes. 

This  is  by  no  means  so  new  or  revolutionary  a  suggestion  as 
it  may  appear.  It  is  found  in  some  form  or  other  in  many  coun- 
tries, and  in  not  a  few  of  the  American  commonwealths.  In 
England,  for  instance,  the  inheritance  tax  is  assessed  by  the 
central  government,  but  a  part  of  the  proceeds  is  allotted  to  the 
local  government.  The  same  is  true  of  some  other  taxes  in 
England.  In  Germany  the  proceeds  of  certain  indirect  taxes  are 
divided  between  the  federal  and  the  state  governments,  and  one 
of  the  important  features  in  the  budgetary  scheme  of  Chancellor 
von  Biilow  was  to  have  a  federally  administered  inheritance 
tax,  a  part  of  the  proceeds  to  go  to  the  state.  ^  In  Canada  it  is 
well  known  that  a  large  part  of  the  provincial  revenues  is  derived 
from  the  proceeds  of  taxes  that  are  levied  by  the  federal  govern- 
ment. Other  instances  might  readily  be  multiplied.  In  the 
United  States  also  many  of  our  separate  commonwealths  raise 
revenues  which  are  apportioned  to  the  local  administrations. 
Even  the  federal  government,  as  in  the  one  famous  instance 
of  the  distribution  of  the  surplus  in  1836,  apportioned  to  the 
states  the  proceeds  of  federally  assessed  taxes.  The  question 
of  the  constitutionality  of  the  scheme  here  suggested  may  be  left 
to  the  lawyers.  My  own  opinion,  expressed  with  all  due  diffidence, 
is  that  a  constitutional  method  can  be  devised.  But  my  addi- 
tional opinion,  expressed  without  any  diffidence,  is  that,  if  consti- 
tutional methods  cannot  be  devised,  the  sooner  a  constitutional 
amendment  is  procured  the  better  it  will  be.  I  can  see  no  other 
avenue  of  escape  from  the  difficulties  that  are  looming  up  on  all 
sides. 

It  may,  indeed,  be  claimed  that  the  difficulties  connected  with 
the  conflicts  of  state  jurisdiction  can  be  overcome  in  another 
way, — namely,  by  interstate  agreements  based  on  considerations 
of  interstate  comity,  whereby  each  state  will  obligate  itself  to 
refrain  frorn  levying  more  than  its  equitable  and  proper  share 
of  the  tax.  While  this  consummation  would  be  exceedingly 
desirable,  it  may  well  be  doubted  whether  it  is  at  all  feasible. 
American  experience  has,  unfortunately,  driven  home  the  lesson 
that  the  separate  commonwealths  cannot  be  depended  upon 
voluntarily  to  relinquish  any  weapons  which  may  constitution- 

*  This  plan  was  reali&ed  in  1920. 


1*1 


^ 


388 


ESSAYS  IN  TAXATION 


1 1 


I9l 


ally  be  employed  in  the  struggle  of  local  and  sectional  interests 
for  economic  advantage.  Even  if  the  majority  of  the  states 
could  be  induced  to  enter  into  such  a  compact,  the  defection 
or  refusal  of  a  few  estates  would  be  sufficient  to  defeat  the  whole 
scheme.  In  other  federal  states,  like  Germany,  e.g.  it  has  been 
found  necessary  to  achieve  the  desirable  uniformity  by  imposing 
it  upon  the  states  through  national  regulation.  It  is  clear,  how- 
ever, that  the  American  commonwealths  would  not  brook  such 
national  interference,  and  that  the  accomplishment  of  the  de- 
sired end  would  require  a  constitutional  amendment  which  it 
would  be  well-nigh  impossible  to  secure. 

Moreover,  even  if  such  interstate  uniformity  could  be  reached 
in  this  way,  it  would  at  best  apply  only  to  the  inheritance  tax. 
It  was  because  of  its  hope  of  effecting  some  such  reform  that 
many  have  expressed  their  strong  preference  for  a  state  inherit- 
ance tax.  But  even  the  thoroughgoing  acceptance  of  the  princi- 
ple of  interstate  comity  would  still  fail  to  meet  the  problem  in- 
volved in  the  corporation  tax — the  problem,  viz.,  of  reaching 
the  corporate  earnings  derived  exclusively  or  in  large  measure 
from  interstate  business.  When  even  the  economic  apportion- 
ment to  each  state  of  its  proper  share  of  revenue  from  such  com- 
plex sources  is  so  difficult  a  matter  to  accomplish,  the  problem  of 
the  fiscal  adjustment  of  interstate  difficulties  by  purely  state  ad- 
ministrative methods  may  be  declared  to  be  well-nigh  insoluble. 

Unless  therefore  all  the  states  carry  out  in  good  faith  the 
principle  of  interstate  comity  as  applied  to  the  inheritance  tax, 
through  which  alone  a  system  of  state  inheritance  taxes  can 
justify  itself,  we  are  forced  back  to  the  scheme  suggested  above 
as  the  sole  practicable  alternative. 

This  method  of  federal  administration  and  state  apportion- 
ment will  accomplish  everything  that  is  needed.  It  will  conform 
to  the  principles  of  efficiency  and  of  suitability,  because  the  taxes 
in  question  can  best  be  administered  by  the  federal  government 
.  and  because  in  that  way  alone  the  gross  inequalities  of  the  pres- 
ent system  can  be  overcome;  while  on  the  other  hand  the  sepa- 
rate states  will  secure  the  revenue  which  they  need,  and  will  be 
able  to  continue  in  the  path  of  tax  reform  which  has  been  so 
auspiciously  entered  up)on. 

Thus  we  reach  the  conclusion  that,  of  the  three  great  taxes 
about  which  the  controversy  has  now  become  so  acute,  the  in- 
come tax  ought  to  be  levied  by  the  federal  government  and  its 
proceeds  utilized  to  diminish  the  burden  of  the  national  indirect 


THE  RELATIONS  OF  STATE  AND  FEDERAL  FINANCE    389 


taxes,  with  the  possibility  of  the  states  tacking  on  additions 
for  their  own  purposes  or  for  local  needs;  that  the  corporation 
tax  should  be  levied  as  a  national  tax  by  the  federal  govern- 
ment, but  under  a  clear  understanding  with  the  separate 
states  that  the  proceeds  should  be  distributed,  in  whole  or 
in  greater  part,  to  them;  and  that  the  same  method  should 
be  applied  to  the  inheritance  tax,  unless  the  states  see  fit  to 
adopt,  in  essence,  the  principle  of  interstate  comity.  To  deter- 
mine the  exact  methods  of  repartition  would  be  comparatively 
easy.  For  that  would  be  a  matter  of  detail,  not  of  principle. 
The  important  point  is  that  some  adjustment  be  reached  whereby 
the  legitimate  demands  of  equality  and  of  uniformity  may  be 
complied  with  without  those  of  efficiency  and  adequacy  being 
sacrificed.  The  interests  of  the  states  must  at  all  costs  be 
safeguarded,  but  the  difficulties  inherent  in  a  state  administra- 
tion of  what  has  become  national  in  character  must  be  avoided. 
The  plan  outlined  above  will  accomplish  this  end.  In  this  way 
and  in  this  way  alone  can  we  do  justice  to  the  underlying  princi- 
ples of  fiscal  and  social  reform.  In  this  way  and  in  this  way  alone 
can  the  relations  of  state  and  federal  finance  be  put  on  an  endm- 
ing  and  a  completely  satisfactory  basis.  ^ 

iNote  to  9th  ed.  (1921).  In  the  decade  that  has  elapsed  since  this 
chapter  was  originally  written  the  outstanding  fact  is  the  fiscal  revolution 
caused  by  the  Great  War.  The  general  principles  elaborated  above  are, 
however,  still  appUcable  to-day.  For  a  fuller  and  more  up-to-date  dis- 
cussion see  infra,  chapter  xxi  on  "The  Relations  of  Federal,  State  and 
Local  Revenues." 


m 


I! 


|t 


I 


CHAPTER  XIII 

THE   IMPORTANCE   OF   PRECISION   IN   ASSESSMENTS  * 

I.  Democracy  and  Administration 

Ever  since  the  days  of  Adam  Smith,  the  demand  for  certainty 
has  been  one  of  the  cardinal  rules  in  taxation.  Adam  Smith 
borrowed  his  rule  from  one  of  the  French  writers.  The  arbi- 
trarmess  of  the  French  system  of  taxation  in  the  eighteenth 
century  had  assumed  such  proportions  as  already  to  pass  beyond 
belief,  and  it  is  no  wonder  that  the  would-be  fiscal  reformers 
raised  a  loud  note  of  protest  against  the  utter  lack  of  certainty 
and  precision  in  the  French  system. 

It  was  not  until  the  French  Revolution  that  the  worst  evils 
of  the  system  were  swept  away;  but  so  fresh  has  been  the  recol- 
lection of  these  particular  evils  that  from  that  day  down  to  the 
very  present,  the  whole  system  of  French  taxation  has  been  so 
framed  as  to  secure,  even  at  the  cost  of  certain  other  advantages, 
the  ends  of  certainty  and  precision  in  assessment. 

The  danger  of  arbitrariness  in  assessment  can  be  well  illus- 
trated in  almost  any  absolute  government.    History  is  replete 
with  examples  that  may  be  taken  from  any  Oriental  monarchy 
and  from  imperial  Rome.    Many  instances  of  the  most  shocking 
character  might  easily  be  taken  from  the  existing  absolute  gov- 
ernments of  the  present.    But  absolutism  is,  unfortunately,  not 
the  only  home  of  arbitrariness  in  taxation.     Strange  to  say 
democracy  no  less  than  absolutism  is  almost  equally  exposed  to 
this  danger.    The  danger,  indeed,  assumes  a  slightly  different 
form.    In  absolutism  there  is  a  lack  of  law  and  of  constitutional 
restrictions;  m  a  democracy,  like  that  of  the  United  States,  for 
example,  which  is  the  classic  home  of  constitutional  limitations, 
the  danger  lurks  not  in  the  law,  but  in  the  administration  of  the 
law;  or  rather,  the  law,  which  on  its  face  seems  to  provide  all 

« This  chapter  was  originally  published  in  the  Addresses  and  Proceedings 
1909  (^^Mence  of  the  International  Tax  Conference,  Columbia, 

390 


THE  IMPORTANCE  OF  PRECISION  IN  ASSESSMENTS  391 

the  constitutional  guarantees  of  fairness  and  equality,  breaks 
down  more  or  less  completely  when  exposed  to  the  test  of  practi- 
cal appUcation  under  conditions  for  which  it  was  not  originally 
framed. 

It  is  well  known  that  in  a  democracy  the  difficulties  of  govern- 
ment are  primarily  administrative  rather  than  constitutional. 
Our  constitutional  problems  have  been,  in  very  large  part,  satis- 
factorily solved;  our  administrative  problems  have  scarcely  been 
attacked.  The  weakness  of  democratic  administration  is  pro- 
verbial,— and  this  is  especially  true  in  the  case  of  fiscal  adminis- 
tration. 

Our  tax  officials  are  almost  uniformly  elective  officials,  and  it 
is  a  notorious  fact  that  elective  officers  are  but  slightly  immune 
from  the  gusts  and  passions  of  popular  approval  or  prejudice. 
Nothing  comes  closer  to  the  modern  citizen  than  the  amount 
of  sacrifice  which  he  is  called  upon  to  make  in  the  way  of  con- 
tributions to  the  public  support,  and  nowhere  is  there  to  be 
found  a  greater  pressure,  whether  of  individuals  or  of  classes 
upon  the  government  official  than  in  the  case  of  assessments  for 
taxation.  The  abuses  which  in  absolutisms  are  due  to  the 
unchecked  will  of  the  absolute  ruler  are  found  duplicated  in 
democracies,  owing  to  the  dependence  of  the  official  upon  the 
electorate. 

This  shortcoming  of  democratic  administration  is  intensified 
by  the  inherent  difficulties  of  modern  economic  life.  In  the 
complex  industrial  society  of  the  present,  with  its  delicate 
machinery  and  its  subtle  interrelations  of  all  kinds,  there  is 
needed  a  far  finer  instrumei^t  of  assessment  than  in  former 
times.  What  is  perfectly  adequate  for  a  primitive  community, 
or  a  simple  agricultural  state,  becomes  glaringly  insufficient  in 
the  modern  industrial  environment.  Not  only  are  the  things 
themselves  to  be  taxed  increasingly  difficult  of  location  and 
appraisement,  but  the  persons  upon  whom  the  assessment  is 
levied  become,  under  modem  economic  conditions,  more  and 
more  elusive.  And  yet,  just  at  a  time  when  a  more  delicate  and 
perfect  machinery  of  assessment  is  required,  a  modem  democ- 
racy contents  itself  with  a  clumsy  and  outlived  mechanism, 
which  is  bound  to  give  dissatisfaction. 

Here  in  the  new  world  we  suffer  from  an  accumulation  of 
evils.  Not  only  is  this  the  home  of  the  greatest  experiment  in 
democracy  that' has  ever  been  attempted,  but  it  is  also  fast 
becoming  the  home  of  the  greatest  industrial  differentiation 


>lll» 


1^^ 


CHAPTER  XIII 

THE   IMPORTANCE   OF  PRECISION   IN   ASSESSMENTS^ 

I.  Democracy  and  Administration 

Ever  since  the  days  of  Adam  Smith,  the  demand  for  certainty 
has  been  one  of  the  cardinal  rules  in  taxation.  Adam  Smith 
borrowed  his  rule  from  one  of  the  French  writers.  The  arbi- 
trariness of  the  French  system  of  taxation  in  the  eighteenth 
century  had  assumed  such  proportions  as  already  to  pass  beyond 
belief,  and  it  is  no  wonder  that  the  would-be  fiscal  reformers 
raised  a  loud  note  of  protest  against  the  utter  lack  of  certainty 
and  precision  in  the  French  system. 

It  was  not  until  the  French  Revolution  that  the  worst  evils 
of  the  system  were  swept  away;  but  so  fresh  has  been  the  recolr 
lection  of  these  particular  evils  that  from  that  day  down  to  the 
very  present,  the  whole  system  of  French  taxation  has  been  so 
framed  as  to  secure,  even  at  the  cost  of  certain  other  advantages, 
the  ends  of  certainty  and  precision  in  assessment. 

The  danger  of  arbitrariness  in  assessment  can  be  well  illus- 
trated in  almost  any  absolute  government.  History  is  replete 
with  examples  that  may  be  taken  from  any  Oriental  monarchy, 
and  from  imperial  Rome.  Many  instances  of  the  most  shocking 
character  might  easily  be  taken  from  the  existing  absolute  gov- 
ernments of  the  present.  But  absolutism  is,  unfortunately,  not 
the  only  home  of  arbitrariness  in  taxation.  Strange  to  say, 
democracy  no  less  than  absolutism  is  almost  equally  exposed  to 
this  danger.  The  danger,  indeed,  assumes  a  slightly  different 
form.  In  absolutism  there  is  a  lack  of  law  and  of  constitutional 
restrictions;  in  a  democracy,  like  that  of  the  United  States,  for 
example,  which  is  the  classic  home  of  constitutional  limitations, 
the  danger  lurks  not  in  the  law,  but  in  the  administration  of  the 
law;  or  rather,  the  law,  which  on  its  face  seems  to  provide  all 

» This  chapter  was  originally  published  in  the  Addresses  and  Proceedings 
of  the  Second  Conference  of  the  International  Tax  Conference,  Columbus, 
1909. 

390 


THE  IMPORTANCE  OF  PRECISION  IN  ASSESSMENTS  391 

the  constitutional  guarantees  of  fairness  and  equality,  breaks 
down  more  or  less  completely  when  exposed  to  the  test  of  practi- 
cal appUcation  under  conditions  for  which  it  was  not  originally 
framed. 

It  is  well  known  that  in  a  democracy  the  difficulties  of  govern- 
ment are  primarily  administrative  rather  than  constitutional. 
Our  constitutional  problems  have  been,  in  very  large  part,  satis- 
factorily solved;  our  administrative  problems  have  scarcely  been 
attacked.  The  weakness  of  democratic  administration  is  pro- 
verbial,— and  this  is  especially  true  in  the  case  of  fiscal  adminis- 
tration. 

Our  tax  officials  are  almost  uniformly  elective  officials,  and  it 
is  a  notorious  fact  that  elective  officers  are  but  slightly  immune 
from  the  gusts  and  passions  of  popular  approval  or  prejudice. 
Nothing  comes  closer  to  the  modern  citizen  than  the  amount 
of  sacrifice  which  he  is  called  upon  to  make  in  the  way  of  con- 
tributions to  the  public  support,  and  nowhere  is  there  to  be 
found  a  greater  pressure,  whether  of  individuals  or  of  classes 
upon  the  government  official  than  in  the  case  of  assessments  for 
taxation.  The  abuses  which  in  absolutisms  are  due  to  the 
unchecked  will  of  the  absolute  ruler  are  found  duplicated  in 
democracies,  owing  to  the  dependence  of  the  official  upon  the 
electorate. 

This  shortcoming  of  democratic  administration  is  intensified 
by  the  inherent  difficulties  of  modern  economic  life.  In  the 
complex  industrial  society  of  the  present,  with  its  delicate 
machinery  and  its  subtle  interrelations  of  all  kinds,  there  is 
needed  a  far  finer  instrument  of  assessment  than  in  former 
times.  What  is  perfectly  adequate  for  a  primitive  community, 
or  a  simple  agricultural  state,  becomes  glaringly  insufficient  in 
the  modern  industrial  environment.  Not  only  are  the  things 
themselves  to  be  taxed  increasingly  difl^icult  of  location  and 
appraisement,  but  the  persons  upon  whom  the  assessment  is 
levied  become,  under  modem  economic  conditions,  more  and 
more  elusive.  And  yet,  just  at  a  time  when  a  more  delicate  and 
perfect  machinery  of  assessment  is  required,  a  modem  democ- 
racy contents  itself  with  a  clumsy  and  outlived  mechanism, 
which  is  bound  to  give  dissatisfaction. 

Here  in  the  new  world  we  suffer  from  an  accumulation  of 
evils.  Not  only  is  this  the  home  of  the  greatest  experiment  in 
democracy  that' has  ever  been  attempted,  but  it  is  also  fast 
becoming  the  home  of  the  greatest  industrial  differentiation 


m 


392 


ESSAYS  IN  TAXATION' 


and  complexity  of  social  and  economic  organization.  Either 
cause  alone  would  suffice  to  create  difficulties  in  tax  assessments; 
combined,  they  form  an  almost  insuperable  barrier  to  success. 
Mankind  has  yet  to  learn  the  lesson  of  combining,  in  fiscal  mat- 
ters at  least,  the  great  principles  of  liberty  and  efficiency.  It  is 
given  to  but  a  few  countries  to  attain  the  administrative  effi- 
ciency which  is  found,  for  instance,  in  the  Prussian  government. 
But  that  administrative  efficiency  is  purchased  at  a  cost  of  inter- 
ference with  individual  liberty,  which  would,  in  this  country  at 
least,  be  considered  entirely  intolerable.  Bureaucracy  is  not 
democracy.  If,  therefore,  we  eliminate  the  bureaucratic  admin- 
istration as  inapplicable  to  American  conditions,  we  are  still 
confronted  by  this  question:  Which  is  better,  the  attempt  to 
posit  an  ideal  in  taxation  which  shall  seek  to  realize  the  principle 
of  equal  justice,  even  though  we  know  that  the  endeavor  to 
realize  this  ideal  in  practice  will  inevitably  be  marred  by  arbitra- 
riness in  administration;  or,  on  the  other  hand,  the  readiness  to 
frame  a  less  ideal  scheme  with  the  knowledge  that  in  practice 
it  would  be  attended  with  greater  precision  and  certainty  of 
operation? 

Put  in  this  way,  the  answer  can  scarcely  be  doubtful.    What 
statesmanship  is  trying  to  accompUsh  is  not  to  pose  abstract 
principles,  but  to  accomplish  advantageous  results.     And  while 
the  province  of  the  scientist  is  indeed  in  part  to  elucidate 
fundamental  principles,  the  publicist  who  is  not  to  remain  a 
mere  closet  philosopher  must  always  narrowly  watch  the  work- 
ing out  of  his  abstract  principles  amid  the  hard  facts  of  daily 
life.     Especially  true  is  this  of  the  science  of  finance,  where 
the  border  line  between  finance  and  administration  is  scarcely 
distinguisliable.     An  ideal  principle  which  is  administratively 
unworkable  is  not  for  an  instant  to  be  compared  with  a  less 
elevated  ideal  which  can  be  actually  carried  out  in  practice. 
The  chief  trouble  with  our  American  democracy  in  matters  of 
taxation  has  been  that  the  people  have  blindly  clung  to  an  ideal 
which  has  become  administratively  impracticable;  and  that 
they  continue  to  hope  against  hope  in  expecting  the  impossible 
to  happen.     Our  administrative  methods  are  indeed  slowly 
improving,  but  it  will  be  a  long  time  before  that  point  of  ad- 
ministrative excellence  has  been  reached  which  will  render 
possible  the  realization  of  the  fiscal  ideal.     In  the  meantime, 
the  disparity  between  the  ideal  and  the  practice  is  such  as  to 
create  in  our  modern  democracy  some  of  the  very  worst  evils 


THE  IMPORTANCE  OF  PRECISION  IN  ASSESSMENTS  393 

of  tax  assessment  which  are  common  in  countries  without  any 
tax  ideals  at  all. 

'  I  do  not  hesitate  to  assert  that  at  the  present  time,  in  the 
United  States,  the  chief  evils  in  public  finance  are  to  be  found 
primarily  in  that  lack  of  certainty  and  precision  which  were 
so  vehemently  emphasized  by  Adam  Smith  a  century  and  a 
half  ago.  In  fact,  if  we  take  a  broad  view  of  the  modern  de- 
velopment of  taxation,  we  shall  find  that  one,  at  least,  of  the 
reasons  for  the  great  extension  of  indirect  taxation  throughout 
the  world  is  to  be  found  in  the  fact  that  here,  at  least,  under  the 
improved  modern  systems,  we  are  able  to  attain  a  certainty 
and  a  definiteness  which  is  lacking  in  the  other  domains  of 
public  revenue.  The  problem  is  on  a  large  scale  what  the 
choice  between  ad  valorem  and  specific  duties  is  on  a  small  scale. 
From  the  point  of  view  of  abstract  justice  there  is  no  doubt  that 
ad  valorem  duties  are  in  the  main  more  equitable,  and  yet  sad 
experience  has  taught  many  a  modern  nation  that  there  is  in 
ad  valorem  duties  such  an  inherent  danger  of  arbitrariness  of 
administration  that  they  have,  perforce,  taken  refuge,  to  a  very 
large  extent,  in  a  system  of  specific  duties,  which  is  administra- 
tively workable,  and  which  contains  increased  guarantees  of  cer- 
tainty and  precision. 

II.  American  Conditions 

The  chief  examples  of  the  evils  of  arbitrary  assessments 
in  the  United  States  at  present  are  found  in  three  classes  of 
taxation:  the  tax  on  real  estate,  the  tax  on  personal  property 
and  the  tax  on  corporations.    Let  us  say  a  word  as  to  each. 

In  the  case  of  real  estate,  the  evils  are  comparatively  insig- 
nificant, owing  to  the  fact  that  real  estate  is  visible  and  tangible, 
and  that  the  impediments  upon  the  transfer  of  real  estate  have 
been  so  far  removed  in  this  country  as  to  make  real  estate 
almost  as  easily  salable  as  personal  property.  Naturally  where 
sales  frequently  occur,  the  selling  value  becomes  a  matter  either 
of  record  or  of  common  knowledge. 

Notwithstanding  this  fact,  experience  has  shown — especially 
in  our  larger  cities — that  the  assessment  of  real  estate  is  very 
largely  arbitrary  in  character.  In  some  cases  the  land  is  held 
on  long  leases  and  sales  are  infrequent.  In  other  cases  a  false 
purchase  price  is  put  in  the  deed,  and  in  still  other  cases  there 
are  sudden  changes,  either  up  or  down,  in  the  value  of  the 
real  estate,  due  to  more  or  less  unpredictable  changes  in  busi- 


394 


ESSAYS  IN  TAXATION 


IK 


IV. 


ness  prosperity,  in  the  opening  up  of  new  means  of  communica- 
tion or  m  the  tides  of  fashion.  As  a  consequence  the  true  value 
of  real  estate  becomes  a  matter  of  very  expert  knowledge; 
and  as  our  tax  departments  are  notoriously  unable  to  secure 
the  services  of  high-paid  experts,  the  assessment  is  very  largely 
left  m  the  hands  of  more  or  less  incompetent  underlings.  The 
result  has  been  a  system  of  haphazard  assessment,  which  even 
with  the  best  intentions,  and  with  all  absence  of  corrupt  motive, 
has  meant  a  decided  inequality  as  between  individuals.  Where) 
as  frequently  occurs,  separate  parcels  within  the  same  city  or 
ward  are  assessed  at  all  the  way  from  sixty  to  ninety  per  cent 
of  their  real  yalue,  we  cannot  speak  of  precision  or  equality  in 
assessment.  / 

A  way  out  of  this  difficulty  has  been  indicated  by  the  adop- 
tion, in  part  at  least,  of  certain  mathematical  rules  to  guide  the 
assessor.    Such  schemes  have  been  applied  by  Mr.  Somers  for- 
merly of  St.  Paul  and  by  the  Board  of  Taxes  and  Assessments  in 
New  York  City.    Without  going  into  the  details  here,  it  may  be 
said  that  the  system  consists  in  applying  known,  instead  of  un- 
known, factors  to  the  problem,  and  in  seeking  to  remove,  as  far  as 
possible,  the  arbitrary  guess  of  the  assessor.    Of  course  it  must 
not  be  forgotten  that  the  opportunity  for  the  mtroduction  of 
mathematical  rules  in  the  assessment  of  real  estate  is  only  a 
limited  one,  for  at  the  bottom  the  basic  values  which  are  to  be 
multiplied  by  this  mathematical  factor  must  largely  remain  a 
matter  of  individual  judgment.    In  the  last  instance  we  cannot 
get  away  from  the  expert  decision  as  to  fundamental  valuations; 
but  to  the  extent  that  known  are  substituted  for  unknown 
factors,  a  decided  improvement  is  possible,  even  in  the  case  of 
real  estate. 

It  IS,  however,  in  the  case  of  personal  property  that  the  evils 
of  discretionary  opinion  become  far  more  flagrant.  There 
IS  no  need  to  repeat  here  the  familar  story  of  the  breakdown 
of  the  general  property  tax;  of  the  failure  to  ascertain  the  exist- 
ence of  many  kinds  of  property,  and  of  the  shocking  inequality 
of  assessment,  even  where  certain  kinds  of  property  are  dis- 
covered. The  adoption  of  mathematical  rules  of  assessment  will, 
of  course,  not  help  a  whit  in  those  cases  where  it  is  impossible  to 
discover  anything  to  be  assessed.  But  in  those  instances  where 
certain  kinds  of  property  are  on  the  assessor's  books  there  is 
room  for  considerable  improvement  by  the  adoption  of  more 
precise  and  definite  rules. 


THE  IMPORTANCE  OF  PRECISION  IN  ASSESSMENTS    395 

As  a  good  example  of  what  I  mean  by  this  statement,  take 
the  case  of  the  mortgage  tax.  The  assessment  of  mortgages  as 
a  part  of  the  general  property  tax  has  everywhere  become 
notoriously  ineffective.  The  recent  adoption  of  the  recording 
mortgage  tax,  as  in  the  state  of  New  York,  where  all  mortgages 
are,  so  to  say,  automatically  subjected  to  taxation  at  the  mo- 
ment of  their  creation,  has  brought  about,  among  many  other 
benefits,  not  only  equality  as  between  mortgages,  but  a  decid- 
edly increased  revenue  to  the  treasury. 

Of  a  character  similar  to  this  is  the  substitution  in  some  of 
the  Canadian  cities  of  the  so-called  business  tax  or  rentals 
tax,  or  the  recent  adoption  in  one  of  the  Australian  states  of 
the  so-called  '^abilities"  tax,  in  lieu  of  the  personal  property 
tax.  The  imposition  of  a  definite  percentage  upon  the  known 
rentals  affords  a  simple  and  precise  method  of  reaching  property 
which  otherwise  would  very  largely  escape  notice  altogether. 

Those  who  are  familiar  with  the  French  system  of  taxation 
will  remember  that  it  is  built  up  entirely  on  the  idea  of  sub- 
stituting known  for  unknown  factors,  and  that  while  the  system 
has  certain  disadvantages  of  its  own,  in  so  far  as  it  does  not 
attain  the  ideal  of  precise  approximation  to  the  exact  conditions 
of  the  individual,  it  possesses  at  all  events  the  advantage  of 
avoiding  the  haphazard  guesses  and  arbitrary  estimates  which 
are  almost  inseparable  from  any  democratic  administration  of 
personal  or  individual  valuations. 

It  is,  however,  in  the  case  of  the  corporation  tax  that  the 
problem  has  become  most  acute  in  this  country.  The  well- 
nigh  universal  system  of  taxing  corporations  is  through  the 
medium  of  the  assessment  of  the  corporate  property.  In 
some  states,  as  even  in  the  great  state  of  New  York,  for  ex- 
ample, the  local  tax  of  corporations  which,  as  almost  every- 
where, is  the  one  of  most  importance,  is  based  upon  the  valua- 
tion of  the  corporate  property  by  local  officials.  Under  this 
system  the  most  absolute  arbitrary  discriminations  are  made, 
as  between  the  various  localities,  and  it  is  a  notorious  fact  that 
those  corporations  where  it  is  physically  possible  to  do  so  will 
often  transfer  their  ostensible  chief  office  from  one  place  to 
another,  in  order  to  secure  a  more  complaisant  assessor.  In 
other  states,  especially  for  certain  classes  of  public  service 
corporations,  the  valuation  has  been  put  into  hands  of  a  state 
board,  which  obviates  indeed  these  glaring  discrepancies  as 
between  localities,  but  which  does  not  give  any  increased  as- 


\ 


Ill 


396 


ESSAYS  m  TAXATION 


lti>' 


» 


surance  of  exactness  or  precision.     Even  in  such  cases  the 
abusers  are  frequent.    And  what  is  worst  of  all,  the  secrecy  ob- 
served by  the  state  board  of  assessors  renders  it  utterly  im- 
possible for  either  the  victim  or  the  scientific  observer  to  point 
out  the  error  m  the  procedure.     Especially  true  is  this  in  all 
those  cases  where  it  has  become  customary  to  assess  the  value 
ot  the  franchises  of  corporations,  a  system  which  is  obviously 
pecuhar  to  our  country,  and  from  which  all  the  European 
states  which  base  the  assessment  on  income,  rather  than  prop- 
erty value,  are  entirely  exempt.    Valuations  of  our  state  boards 
ot  taxation  are  so  notoriously  inadequate  that  in  the  case  of 
one  class  of  corporations,  namely,  railroads,  the  cry  has  now 
gone  forth  for  an  official  national  valuation.     Without  going 
into  the  arguments  for  and  against  this  scheme,  it  need  only 
be  pointed  out  that  the  successful  prosecution  of  this  idea  will 
not  only  cost  tens  of  millions  of  dollars,  but  will  take  a  very 
long  time  to  effect;  and  that  the  attempt  to  apply  this  same 
method  o    national  official  valuation  to  all  corpor'ltiSns  tT^^ 
are  su^^ject  to  taxation  would  not  only  be  hopelessly  expensive, 
but   would    for   obvious   reasons,   be   entirely  impracticable, 
m  the  great  niass  of  cases,  if  we  are  to  have  any  valuation  of 
property  at  all,  we  shall  have  to  content  ourselves  with  the 
perpetuation   of   the   present   most    unsatisfactory   methods. 
The  experiences  that  we  have  had,  even  with  the  so-called 
official  valuations  of  railways  in  Michigan  and  Wisconsin   are 
not  such  as  to  warrant  the  confident  expectation  that  they  are 
satisfactory  for  tax  purposes,  and  that  they  avoid  the  evils 
of  arbitrary  assessment.  ^ 

How  much  better  it  is  to  take  some  external  criterion,  as  is 
now  the  practice  m  a  few  of  our  advanced  states.    In  the  case 
ot  public  service  corporations  a  definite  percentage  of  receipts 
IS  an  obviously  simple  method.    This  is  not  the  place  to  discuss 
the  pros  and  the  contras  of  a  tax  on  gross  receipts  versus  a  tax 
on  net  receipts;  but  it  may  be  pointed  out  that  so  far  as  rail- 
roads, at  all  events,  are  concerned,  under  the  new  system  of 
accounting  which  has  been  enforced  by  federal  law,  the  chief 
objection  formerly  urged  against  the  tax  on  net  receipts  loses 
much  of  Its  potency.     But  whether  we  have  a  tax  on  net 
receipts  or  a  tax  on  gross  receipts,  it  is  undeniable  that  the 
tax  IS  precise  and  definite;  that  there  is  no  room  for  secrecy 
or  arbitrary  action,  and  that  equality  as  between  classes  of 

1  Cf.  supra,  pp.  230.  231. 


THE  IMPORTANCE  OF  PRECISION  IN  ASSESSMENTS    397 

corporations  or  between  individuals  in  a  class,  may  be  secured 
by  the  adoption  of  precise  mathematical  rules  which  will  cause 
the  rate  to  vary  in  accordance  with  the  definite  and  easily 
ascertainable  factors. 

It  is  true  indeed  that  a  few  cases  have  recently  been  seen  of 
state  legislatures  abandoning  the  receipts  tax  for  the  system 
of  valuation,  but  I  think  that  I  am  safe  in  sajdng  that  expert 
opinion  is  almost  unanimous  in  this  country  that  this  was  a 
step  backward  and  not  a  step  forward;  and  that  all  the  ends 
which  it  was  attempted  to  secure  by  the  reintroduction  of  the 
valuation  system  might  have  been  secured  by  a  modification 
of  the  rates  and  methods  of  the  old  system.  Any  method  of 
corporate  taxation,  in  short,  which  is  based  upon  the  applica- 
tion of  precise  and  definite  rules,  is  preferable  to  the  happy-go- 
lucky  system  of  property  valuation,  whether  it  be  a  tax  on 
gross  receipts  or  on  net  receipts;  whether  it  be  a  tax  on  a  certain 
proportion  of  the  market  value  of  the  stocks  or  of  the  bonds, 
or  of  both  together;  whether  it  takes  some  other  exterior  criterion 
of  the  business:  any  of  these  methods  is  susceptible  of  a  more 
or  less  successful  application  ])ecause  it  avoids  the  fundamental 
evil  in  our  present  system.  No  one  man  or  set  of  men  is  able  to 
value  intelligently  and  precisely  the  selling  value  of  the  multi- 
plicity of  corporations  in  our  modern  industrial  world,  with  the 
continual  oscillation  of  business,  and  with  the  increasing  com- 
plexity of  industrial  interrelations.  The  task  is  one  for  superhu- 
man strength  and  ability,  and  with  the  weakness  of  our  demo- 
cratic administrative  methods,  the  attempt  would  be  ludicrous, 
if  it  were  not  so  lamentable.  The  first  step  in  the  reform  of 
methods  of  assessment  is,  as  far  as  possible,  to  substitute  the 
known  for  the  unknown. 

What  the  future  has  in  store  for  us  it  is  given  to  no  man  to 
know.  Popular  customs  and  prejudices  yield  only  slowly.  The 
thick  mist  of  ignorance  and  inertia  can  be  dispelled  only  very 
gradually  by  the  sunlight  of  knowledge  and  observation.  But 
if  the  experience  of  mankind  is  to  afford  us  any  help  in  fiscal 
matters,  and  if  the  history  of  other  countries  under  somewhat 
similar  conditions  is  to  be  of  any  aid  to  us,  it  may  be  stated  with 
some  reasonable  degrees  of  confidence  that  advance  in  tax  re- 
form is  to  be  sought  rather  in  the  progressive  excellence  of 
administrative  methods  than  in  the  elaboration  of  new  and  high- 
sounding  ideals.  The  ideals  may  be  the  same  for  all  countries; 
the  administrative  methods  must  differ  according  to  the  pe- 


m 


i 

I 


it 


398 


ESSAYS  IN  TAXATION 


culiarities  of  each.  In  our  American  adherence  to  an  abstract 
ideal  we  have  failed  to  let  our  administrative  methods  keep 
pace  with  the  attempted  realization  of  the  ideal.  In  our  en- 
deavor to  secure  the  taxation  of  all  property,  we  have  not  only 
attempted  the  impossible,  but  we  have  opened  wide  the  door 
to  all  the  abuses  of  practical  inequality  of  unintentional  in- 
justice and  of  widespread  arbitrariness. 
/  Of  all  the  methods  that  cry  out  most  loudly  for  reform, 
that  of  property  valuation  is  the  most  important.  The  great 
need  of  the  day  is  to  replace  arbitrariness  by  certainty,  and  to 
secure  practical  equality  in  taxation  by  substituting,  as  far  as 
possible,  definite  and  fixed  rules  of  assessment  for  the  hodge- 
podge and  capricious  system,  or  lack  of  system,  which  is  well- 
nigh  universal  to-day .y 


CHAPTER  XIV 

THE  CLASSIFICATION  OF  PUBLIC  REVENUES 

Among  the  unsettled  questions  of  the  science  of  finance 
few  are  more  troublesome  than  that  of  classifying  the  differ- 
ent kinds  of  pubHc  income.  Classification  is  indeed  not  of 
supreme  importance,  for  matter  is  always  more  essential  than 
form.  But  correct  classification  is  helpful  in  many  ways. 
It  requires  logical  criticism  and  rigorous  analysis,  and  thus 
becomes  a  test  of  mental  vigor;  it  conduces  to  accurate  defini- 
tion and  prevents  looseness  of  expression  and  confusion  of 
thought;  It  may  have  important  practical  results  in  deciding 
questions  of  fact  and  in  assigning  definite  values  to  doubtful 
categories;  it  points  out  contrasts  and  resemblances,  and  by 
e  immating  or  combining  what  is  common,  often  suggests  a 
clearer  conception  of  the  subject-matter.  Correct  classification 
is,  m  truth,  an  essential  condition  of  all  scientific  progress. 

It  has  frequently  been  remarked  that  we  must  distinguish 
between  historical  and  actual  classifications.  For  example 
the  whole  class  ofJuciatiye,j^:erogatives— the  Regalia  of  the 
leutomc  kingdoms  and  of  earlyTii^incience— were  formerly 
separated  from  the  other  categories  of  public  revenues  because 
of  their  commanding  importance  in  mediaeval  countries  and  of 
their  supposed  points  of  difference;  whereas  well-nigh  every 
recent  writer  of  importance,  even  in  Germany,  has  confessed 
that  all  such  revenues  are  capable  of  being  classified  under  one 
of  the  other  modern  categories.  So,  again,  while  the  revenue 
from  the  incidents  of  feudal  tenure  played  a  great  role  in  the 
classification  of  Blackstone  and  other  early  writers,  the  need  of 
showing  the  composite  nature  of  such  revenues  has  been  ob- 
viated by  the  disappearance  of  the  tenures  themselves.  Finally, 
special  assessments  are  a  growth  of  comparatively  recent  times! 
Only  a  short  time  ago,  a  classification  of  public  revenues  might 
safely  have  ignored  their  existence;  now  a  logical  classification 
of  actual  revenues  would  be  incomplete  without  them.  What 
concerns  us  here  is  a  classification  appUcable  to  modern  con- 
ditions. 

399 


I 


400 


ESSAYS  IN  TAXATION 


I.  The  Primary  Classification 

From  the  standpoint  of  the  individual  all  contributions  to 
government  are  either  gratuitous,  contractual  or  compulsory. 
Every  governmental  revenue  must  fall  within  one  of  these 
three  great  classes.  Individuals  may  make  the  government 
a  free  gift,  they  may  agree  or  contract  to  pay,  or  they  may  be 
compelled  to  pay.  The  first  method  of  securing  revenue  was 
at  one  time  important,  but  its  influence  to-day  is  sUght.  The 
second  and  third  methods  correspond  to  the  widely  adopted 
classification  suggested  by  Adam  Smith, ^  who  tells  us  that: 

"The  revenue  which  must  defray  .  .  .  the  necessary  expenses  of 
government  may  be  drawn  either,  first,  from  some  fund  which  pe- 
culiarly belongs  to  the  sovereign  or  commonwealth,  and  which  is  in- 
dependent of  the  revenue  of  the  people,  or,  secondly,  from  the  revenue 
of  the  people." 

That  is,  the  government  may  in  the  first  place  act  like  a 
private  individual,  possessing  lands  or  other  revenue-yielding 
property,  and  engaging  in  mercantile,  financial  or  industrial 
pursuits.  As  Petty,  the  author  of  the  first  systematic  English 
treatise  on  taxation,  put  it  in  the  seventeenth  century,  the 
state  is  in  some  places  the  common  cashier,  the  common  usurer, 
the  common  insurer  or  the  common  beggar.-  This  is  what  the 
French  call  in  the  widest  sense  the  revenue  from  the  private 
and  industrial  domain  of  the  state,  and  what  the  Germans 
term  the  private-economic  income.  A  better  term,  perhaps, 
is  contractual  income;  since  the  government  here  puts  itself 
in  the  position  of  a  private  person  making  a  contract  with  an- 
other person.  Such  payments  all  rest  on  an  agreement  between 
the  two  contracting  parties,  in  sharp  contrast  to  the  payments 
which  the  government  demands  by  virtue  of  the  sovereign 
powers  delegated  to  it. 

We  often  hear  of  the  distinction  between  voluntary  and  com- 
pulsory contributions,  meaning  by  the  former  the  free  gifts 
of  the  citizens.  This  distinction,  however,  is  not  perfectly 
accurate;  for  contractual  contributions  are  also  voluntary, 
without  being  gifts.  In  the  case  of  a  contract,  the  government 
agrees  to  do  some  particular  thing  in  return  for  a  payment, 

1  Wealth  of  Nations,  book  v.,  chap.  ii. 

2  William  Petty,  A  Treatise  of  Taxes  and  Contributions,  London,  1667, 
pp.  60,  61. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     401 

leasing  land,  for  instance,  in  return  for  rent;  in  the  case  of  the 
free  gift,  the  government  does  not  undertake,  nor  does  the  donor 
expect,  any  specific  action  in  return.  Yet  both  payments  are 
voluntary.  We  must  therefore  distinguish  not  merely  between 
voluntary  and  compulsory  contributions,  but  between  gratui-  I 
tous,  contractual  and  compulsory  contributions.  / 

Thus  far  almost  all  writers  are  agreed.  The  difficulty  arises 
when  we  desire  to  classify  the  various  kinds  of  compulsory 
revenues  and  to  distinguish  between  some  of  these  subdivisions 
and  the  different  kinds  of  contractual  revenues.  All  possible 
combinations  have  been  made,  especially  by  recent  German 
writers.  Let  us  confine  ourselves  in  this  chapter  to  the  pith 
of  the  controversy,  namely,  to  the  subdivision  of  the  compulsory 
contributions  and  their  relation  to  some  of  the  contractual 
revenues,  as,  for  instance,  the  charges  made  for  the  services  of 
governmental  enterprises,  like  the  postoffice,  the  telegraph  and 
the  like. 

In  taking  the  property  of  individuals  the  sovereignty  of 
the  modern  state  manifests  itself  in  different  ways.  The  govern- 
ment may  exercise  in  turn  the  power  of  eminent  domain,  the 
penal  power,  the  police  power  or  the  taxing  power. 

The  power  of  eminent  domain  confers  on  the  government  \ 
the  right  of  taking  at  its  discretion,  and  to  an  indefinite  extent, 
private  property  for  particular  uses.  With  the  constitutional 
and  moral  limitations  upon  this  power  we  have  not  here  to 
deal,  chiefly  because  the  power  is  for  the  most  part  not  a  source 
of  net  revenue.  The  fact  that  in  all  free  governments  private 
property  cannot  be  taken  under  this  power  except  for  public 
use,  and  even  then  not  without  just  compensation,  would  in 
itself  show  that  no  net  income  to  the  state  is  contemplated. 
Yet  such  revenue  may  accrue  incidentally;  for  the  benefits 
accruing  to  the  government  through  the  expropriation  may 
conceivably  be  greater  than  the  damage  inflicted  on  the  private 
individual.  Revenue  through  expropriation  is  thus  the  first 
class  of  compulsory  income. 

The  second  sovereign  power  of  fiscal  importance  is  the  penal 
power,  or  right  of  inflicting  fines  and  penalties,  known  tech- 
nically as  the  power  of  sanction.  This  might  be  declared  a  part 
of  the  police,  or  regulative,  power  of  the  state,  since  every 
government  regulation  must  carry  with  it  the  power  of  en- 
forcement. But  on  account  of  the  decidedly  problematic  fiscal 
importance  of  the  police  power,  it  seems  better  to  separate  them. 


PI 


li! 


iHy 


402 


ESSAYS  IN  TAXATION 


The  power  to  adjudge  fines  and  penalties,  however,  while 
often  quite  important  as  a  source  of  revenue,  belongs  rather 
to  penology  and  administration  than  to  the  science  of  finance; 
for  the  private  property  is  here  taken,  not  in  accordance  with 
the  needs  of  the  state  or  i^ith  any  principles  of  equality  or 
uniformity  or  benefits  or  compensation,  but  solely  as  a  pun- 
ishment inflicted  on  the  individual.  The  only  limit  to  its  fiscal 
significance  in  free  countries  is  the  vague  provision,  as  in  the 
constitution  of  the  United  States,  that  excessive  fines  shall  not 
be  imposed  or  cruel  and  unusual  punishments  inflicted.  Fines 
and  penalties  thus  form  by  themselves  a  class  of  compulsory 
revenues  levied  according  to  definite  but  non-fiscal  principles. 
It  is  obviously  wrong  to  class  them  with  fees,  as  do  some  writers, 
or  to  ignore  them  entirely,  as  do  others. 

The  third  sovereign  power  of  the  state  is  the  police  power,  or 
the  power  of  regulation.  This  has  played  a  great  r61e  in  Ameri- 
can jurisprudence.  Yet  it  may  be  confidently  stated  that  from 
the  standpoint  of  the  science  of  finance  the  distinction  drawn 
between  the  police  power  and  the  taxing  power  is  to  a  great 
extent  a  fiction,  referable  to  certain  difficulties  in  American  con- 
stitutional law  and  to  a  lack  of  economic  analysis  on  the  part  of 
the  judges.    Let  us  study  this  point  more  in  detail. 

II.  The  Police  Power  versus  the  Taxing  P(mer 

The  commonly  accepted  distinction  between  these  powers 
is  that  the  former  is  for  reflation  and  the  latter  for  revenue. 
One  argument  in  support  of  this  view  is  that  advanced  by 
authors  like  Mr.  David  A.  Wells,  who  contend  that  a  so- 
called  tax  which  looks  to  anything  besides  the  securing  of 
revenue  is  not  a  tax,  but  an  unconstitutional  exercise  of  the 
taxing  power.  But  even  adherents  to  the  distinction  between 
the  police  power  and  the  taxing  power,  like  Judge  Cooley, 
confess  ''that,  in  the  apportionment  of  taxes,  other  considera- 
tions than  those  which  regard  the  production  of  a  revenue  are 
admissible,  and  that  the  right  of  any  sovereignty  to  look  be- 
yond the  immediate  purpose  to  the  general  effect  cannot  be 
disputed."  ^  The  position  of  Mr.  Wells  is  the  exact  opposite 
of  that  of  Professor  Wagner,  who  includes  in  the  very  definition 
of  a  tax  the  **  socio-political"  element  or  the  duty  of  regulating 
and  correcting  the  distribution  and  use  of  private  property.^ 

*  Cooley,  Taxation,  2d  edition,  p.  587. 

>  Wagner,  Finanzwissenschaft,  n.  (2d  edition,  1890),  p.  210. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     403 

The  one  writer  would  refuse  the  name  "tax"  to  an  imposi- 
tion looking  to  anything  else  than  mere  revenue:  the  other 
ought  logically  to  withhold  the  name  from  an  imposition  not 
looking  to  anything  else  than  mere  revenue.  These  positions 
are  mutually  exclusive  and  equally  extreme. 

On  the  other  hand,  the  distinction  of  Judge  Cooley  is  almost 
quite  as  untenable.    Cases  where  the  primary  purpose  is  regu- 
lation, he  thinks,  are  referable  to  the  police  power;  cases  where 
the  primary  purpose  is  revenue  are  referable  to  the  taxing  power. 
Mr.  Cooley  himself  confesses  that  import  duties  with  mcidental 
protection  are  taxes.    But  suppose,  as  has  often  occurred,  that 
they  are  protective  duties  with  incidental  revenue.   Are  they  any 
the  less  taxes  on  that  account?    How  about  the  tax  on  bachelors, 
which  was  imposed  for  the  express  purpose  of  dunmishing 
celibacy?     How  about  the  ten  per  cent  tax  on  state  bank 
notes,  imposed  avowedly  to  destroy  the  state  bank  issues? 
How  about  the  American  tax  on  oleomargarine,  confessedly  of  a 
regulative  nature?    How  about  taxes  on  spirituous  liquors  in 
the  shape  of  liquor  licenses,  to  regulate  and  diminish  the  liquor 
traffic?    How  about  the  many  indirect  taxes  enacted  in  con- 
sequence of  sumptuary  laws?    How  about  certain  inheritance 
taxes,  whose  imposition  is  demanded  on  the  express  ground 
that  they  wiU  limit  fortunes?    How  about  the  single  tax,  whose 
only  raison  d'etre  is  the  attempt  to  change  the  existing  dis- 
tribution of  wealth?    Shall  we  call  the  Indian  duty  on  opium  a 
tax,  and  refuse  the  name  to  the  American  internal  revenue 
cha,rge,  because  India  looks  primarily  to  revenue,  and  the 
United  States  to  regulation?    Shall  we  call  the  French  impot 
des  patentes  a  tax,  and  deny  the  name  to  the  analogous  license 
or  privilege  taxes  in  some  of  the  Southern  commonwealths, 
because  in  the  latter  case  the  object  is  sometimes  distinctively 
regulative?     In  fact,  if  this  is  to  be  our  line  of  cleavage,  we 
must  reconstruct  the  science  of  finance  and  remove  from  the 
class  of  taxes  whole  categories  of  impositions  to  which  no  one 
has  ever  thought  of  denying  the  character  or  name  of  tax. 

The  confusion  in  the  American  law  is  at  once  complimentary 
and  uncomplimentary  to  the  judiciary.  It  is  complimentary  in 
the  sense  that  the  judges,  when  brought  face  to  face  with  the 
conflict  between  constitutional  limitations  and  the  demands  of 
social  evolution  (or  what  is  known  in  legal  parlance  as  public 
policy),  have  sought  to  remain  true  to  their  function  as  the  final 
interpreters  of  social  progress.    This  they  have  been  able  to  do. 


{ 


/ 


nil 


404 


ESSAYS  IN  TAXATION 


i 


11 


however,  only  through  legal  fictions  and  divergent  decisions. 
Anyone  who  has  studied  the  American  law  of  taxation  as  a  whole 
must  have  become  painfully  conscious  of  the  hopeless  contradic- 
tions among  the  laws  of  the  several  states  on  many  important 
points.  This  condition  is  due  in  great  measure  to  the  fact  that 
the  constitution  or  laws  of  one  state  by  implication  forbid  what 
the  constitution  or  laws  of  another  state  expressly  permit.  In 
order  to  take  an  actual  case,  which  is  perhaps  in  Une  with  public 
policy,  out  of  the  range  of  the  legal  inhibition,  the  courts  of  the 
first  state  are  forced  to  adopt  an  interpretation  wholly  unneces- 
sary in  the  second.  Thus  the  continuity  of  social  development 
is  preserved,  even  at  the  sacrifice  of  legal  consistency  or  uni- 
formity. For  instance,  in  New  York  street-car  licenses  are  held 
to  fall  under  the  taxing  power,  while  in  Pennsylvania  they  are 
put  under  the  police  power,  simply  because,  under  the  particular 
conditions,  it  seemed  to  be  a  matter  of  equity,  in  the  one  case 
to  uphold,  and  in  the  other  to  object  to,  such  a  charge.^  The 
payment  in  the  two  instances  was  the  same,  both  in  amount  and 
in  principle;  but  the  attempt  to  make  the  same  laws  conform  to 
a  public  policy  which  differs  in  the  different  states  has  brought 
about  a  contradiction.  So,  too,  the  whole  system  of  high  li- 
cense or  liquor  taxes  is  in  some  states  brought  under  the  taxing 
power;  but  in  others,  because  of  certain  constitutional  diflicul- 
ties,  it  is  put  under  the  police  power.  ^  To  this  extent  the  police 
power  has  been  a  legal  fiction  to  enable  the  courts  to  uphold  what 
could  not  well  be  brought  under  the  taxing  power;  although  in 
another  leading  case  ^  the  liquor  tax  was  upheld  under  the  taxing 
power  because  there  was  a  constitutional  obstacle  to  its  being 
put  imder  the  licensing  or  police  power.  The  poUce  power  is  of 
great  and  growing  legal  importance  in  the  United  States,  largely 
because  of  the  peculiar  principles  of  American  governmeiitctl 
relations,  whereby  local  bodies  are  deemed  to  have  only  those 
powers  expressly  delegated  to  them,  in  contradistinction  to  the 
European  method  according  to  which  local  bodies  possess,  in 
certain  respects,  all  powers  not  expressly  withheld  from  them.'* 
Many  of  our  cities  and  towns  have  no  taxing  power;  and  even 

*  Cf.  2d  Avenue  Railroad  Cases,  32  N.  Y.  261,  with  Railroad  Company 
vs.  Philadelphia,  58  Pa.  119.  What  was  held  "reasonable  "  in  one  case  was 
declared  "unreasonable  "  in  the  other. 

2  Burch  vs.  Savannah,  42  Ga.  596.    Cf.  50  Texas,  86. 
=>  Youngblood  vs.  Sexton,  32  Mich.  406. 

*  Goodnow,  "Powers  of  Municipalities  respecting  Public  Works,"  Publi- 
ecUions  of  the  American  Economic  AssodaUorit  ii.,  pp.  72-79.     Professor 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     405 

when  they  have  the  power,  it  is  strictly  construed.  The  courts, 
therefore,  have  been  compelled  to  uphold  much  under  the  police 
power  that  under  other  and  more  favorable  conditions  they 
would  and  could  have  upheld  imder  the  taxing  power. 

On  the  other  hand,  there  is  an  element  which  is  not  quite  so 
complimentary  to  the  judges.  The  courts  have  frequently  con- 
fused taxes  in  the  narrower  sense  with  the  exercise  of  the  taxing 
power  in  the  wider  sense.  As  we  shall  see,  there  are  various 
forms  in  which  the  taxing  power  may  manifest  itself:  taxes  in  the 
narrower  sense  are  only  one  form.  Special  assessments  for 
instance,  have  been  almost  universally  upheld  as  an  exercise 
of  the  taxing  power,  while  sharply  distinguished  from  taxes  in 
the  narrower  sense.  Yet  in  a  leading  case  sidewalk  assessments, 
which  as  a  matter  of  principle  do  not  differ  at  all  from  other 
special  assessments  upheld  imder  the  taxing  power,  have  been 
declared  police  regulations.^  The  court  has  here  simply  confused 
taxes  with  the  taxing  power.  It  is,  moreover,  impossible  to 
see  any  difference  between  the  various  cases  of  sewer  and  levee 
assessments  quoted  by  Mr.  Cooley  as  an  exercise  of  the  police 
power  and  the  cases  of  sewer  and  levee  assessments  quoted  by 
him  in  another  chapter  as  falling  under  the  taxing  power.  ^  The 
whole  distinction,  in  fact,  rests  upon  a  confusion.  So,  again, 
while  both  taxes  and  fees  are  an  exercise  of  the  taxing  power, 
because  it  has  frequently  been  deemed  necessary  to  uphold 
license  fees  by  distinguishing  them  from  taxes,  many  of  the 
courts  have  declared  license  fees  to  be  an  exercise  not  of  the 
taxing  power  but  of  the  police  power,  thus  confusing  taxes  with 
the  taxing  power.  There  is,  as  we  shall  see,  a  decided  difference 
between  a  license  fee  and  a  tax;  but  it  is  not  the  one  stated  by  the 
courts.  It  is  this  groping  after  the  real  distinction  between  fees 
and  taxes,  to  be  explained  in  a  moment,  which  has  led  judges, 
not  trained  in  economics,  to  draw  the  line  between  payments 
under  the  police  power  and  those  under  the  taxing  power.  The 
distinction  between  fees  and  taxes  is  not  synonymous  with  the 
distinction  between  the  police  power  and  the  taxing  power;  for 
there  are  many  classes  of  fees,  like  court  fees,  fees  for  legal  docu- 
ments and  school  fees,  which  cannot  possibly  be  put  under  the 
police  power. 

Goodnow  terms  these  respectively  the  systems  of  legislative  and  of  admin- 
istrative control. 

1  Godard,  Petitioner,  16  Pick.  504, 509,  quoted  by  Cooley,  Taxation,  p.  589. 

«  Cooley,  Taxation,  pp.  588-591,  compared  with  pp.  616-620. 


406 


ESSAYS  JN  TAXATION 


dii  I 


M 


While,  then,  it  may  be  expedient  from  the  legal  point  of  view  to 
distinguish  between  the  police  power  and  the  taxing  power,  rul- 
ing that  the  one  is  for  regulation  and  the  other  for  revenue, 
and  while  the  constitutional  importance  of  the  police  power, 
especially  in  the  United  States,  is  in  many  respects  considerable, 
the  distinction  from  the  economic  and  fiscal  standpoint  is,  never- 
theless, wholly  unnecessary.  A  tax  is  no  less  a  tax  because  its 
purpose  is  regulation  or  destruction;  and  a  fee  or  payment  for 
regulation  brings  in  just  as  much  revenue  as  a  precisely  identical 
fee  imposed  primarily  for  revenue.  From  the  standpoint  of 
finance  the  test  is  not  whether  the  payment  is  for  regulation, 
but,  as  we  shall  see  later,  whether  it  is  primarily  for  special  bene- 
fit or  primarily  for  common  benefit;  that  is,  it  is  a  distinction 
not  between  police  power  and  taxing  power,  but  between  fees 
and  taxes.  In  other  words,  payments  that  are  legally  put  under 
the  police  power  ought  scientifically  to  be  classed  under  the 
taxing  power. 

III.  Fees 

We  come  finally  to  what  is  from  the  fiscal  standpoint  the 
chief  sovereign  power  of  the  state — the  power  of  jax^tion. 
Expropriation  is  not  fiscally  important,  the  significance  of  fines 
and  penalties  does  not  lie  in  the  financial  domain,  and  the  pohce 
power,  as  we  have  just  seen,  is  of  no  consequence  from  the  stand- 
point of  revenue;  but  the  taxing  power  is  of  an  entirely  different 
nature. 

The  taxing  power  may  manifest  itself  in  three  different  forms, 
known  respectively  as  specialassessments,  fees  and  taxes.  These 
three  forms  are  all  species  oMaxationlrTthewiHer  sense,  so  far 
as  they  differ  on  the  one  hand  from  contractual  revenue  or 
quasi-privBte  income,  and  on  the  other  hand  from  the  remaining 
divisions  of  compulsory  revenue,  like  expropriation  and  fines. 
What  is  common  to  all  three  is  that  they  are  compulsory  contri- 
butions levied  for  the  support  of  government  or  to  defray  the 
expenses  incurred  for  public  purposes.  That  is  the  essence  of 
the  taxing  power.  But,  although  they  are  all  forms  of  taxati6n 
in  this  wider  sense,  the  differences  between  fees  and  special 
assessments  on  the  one  hand,  and  taxes  in  the  narrower  sense 
on  the  other,  are  so  marked  that  they  must  be  put  into  separate 
categories.  Let  us  study  their  characteristics,  taking  up  first 
those  payments,  like  fees,  tolls,  costs  and  charges,  which  may 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     407 

be  summed  up  under  the  general  head  of  fees  (the  German 
Gebuhren,  the  French  taxes,  the  Italian  tasse). 

The  distinction  between  fees  and  taxes,  although  sometimes 
ascribed  to  Rau,  is  really  much  older.  Adam  Smith  already 
speaks  of  certain  expenses  "which  are  laid  out  for  the  benefit  of 
the  whole  society."  "It  is  reasonable,  therefore,"  he  adds, 
"that  they  should  be  defrayed  by  the  general  contribution  of 
the  whole  society,  all  the  different  members  contributing  as 
nearly  as  possible  in  proportion  to  their  respective  abilities." 
These,  as  he  afterward  explains,  are  taxes.  On  the  other  hand, 
he  speaks  of  certain  outlays,  as  for  justice,  for  "persons  who  give 
occasion  to  this  expense,"  and  "who  are  most  immediately 
benefited  by  this  expense."  The  expenditures,  therefore,  he 
thinks,  "may  very  properly  be  defrayed  by  the  particular  con- 
tributions of  these  persons,"  that  is,  by  fees  of  court.  And  he  ex- 
tends this  principle  to  tolls  of  roads  and  various  other  expenses.^ 
The  "particular  contributions"  of  Adam  Smith,  in  distinction 
from  general  contributions,  are  nothing  but  fees  in  distinction 
f  romtaxes.  The  same  distinction  is  found  several  decades  before 
Adam  Smith  in  the  work  of  Justi.  He,  however,  like  the  other 
Germans  of  his  time,  looFed  upon^e  Regalia,  or  lucrative  pre- 
rogatives, as  a  separate  class;  and  hence  classified  public  revenues 
into  (1)  domains,  (2)  regaUa,  (3)  taxes,  and  (4)  casual  revenues, 
including  prices  and  payments  for  special  privileges.*  Later  on, 
Rau  gave  these  latter  payments  the  name  of  Gebuhren  or  fees; 
but  the  essence  of  the  distinction  is  to  be  foimd  in  Justi,  and 
still  more  clearly  in  Adam  Smith. 

A  fee,  then,  is  a  manifestation  of  the  taxing  power.  It  is  a 
compulsory  contribution  for  a  service  in  which  the  element  of 
public^urpose  must  be  present;  but  it  differs  from  a  tax  in 
several  important  points. 

First,  a  tax  is  levied  as  a  part  of  a  common  burden;  a  fee  is 
assessed  as  a  payment  for  a  special  privilege.  The  basis  of  taxa- 
tion is  the  ability  or  the  faculty  of  the  taxpayer;  the  basis  of  a 
fee  is  the  special  benefit  accruing  to  the  individual.  In  the  case 
of  a  tax,  this  abiUty,  it  is  true,  may  be  influenced  to  a  certain 
extent  by  the  opportunities  or  privileges  or  benefits  received. 
But  the  difference  is  the  test.  In  the  case  of  a  fee,  the  benefit 
is  measurable;  in  the  case  of  a  tax,  the  benefit  is  not  susceptible 

*  Wealth  of  Nations,  book  v.,  chap,  i.,  part  iv.  (vol.  ii.,  p.  402,  of  Thorold 
Rogers'  edition).    Compare  book  v.,  chap,  i.,  part  ii.  and  iii.,  passim. 
2  Justi,  Staatswirthschaft,  2d  edition,  1758,  ii.,  pp.  95,  400-429, 


HI 


't 


408 


ESSAYS  IN  TAXATION 


\ 


i 


of  direct  measurement.  In  the  case  of  a  fee,  the  particular 
advantage  is  the  very  reason  of  the  payment;  in  the  case  of  a  tax, 
the  particular  advantage,  if  it  exists  at  all,  is  simply  an  incidental 
result  of  the  state  action. 

The  question  of  special  benefit  was  originally  of  minor  impor- 
tance; the  mediaeval  monarch  exacted  in  the  shape  of  fees  and 
charges  about  what  he  chose,  disguising  exactions  under  the 
mask  of  payments  for  special  privileges.  Even  there,  however, 
it  may  be  said,  not  that  the  idea  of  benefit  was  absent,  but  that 
the  monarch  made  himself  the  judge  of  the  amount  of  benefit. 
That  his  despotic  estimate  often  resulted  in  hardship  does  not 
alter  the  theory.  Gradually,  however,  the  idea  of  actual  benefit 
came  to  the  foreground,  until  it  has  fiinally  become  the  control- 
ling factor. 

A  second  distinction  between  fees  and  taxes  is  that  a  fee  does 
not  normally  exceed  the  cost  of  the  particular  service  to  the 
individual.  This,  however,  although  commonly  made  much  of, 
is  of  subordinate  importance.  In  the  first  place,  it  can  obviously 
apply  only  to  those  fees  paid  in  return  for  some  positive  work 
done  by  government.  The  government ,  indeed,  must  always  give 
something  in  return  for  a  fee;  but  in  many  cases  it  may  give  only 
a  permission  to  do  something— a  permission  which  costs  almost 
nothing,  and  for  which  a  considerable  fee  may  be  exacted.  The 
controlling  consideration  here  is  not  cost,  but  measurable  spe- 
cial benefit.  Historically,  we  know  that  these  special  charges 
were  made  entirely  irrespective  of  cost.^  But  even  in  the  case 
of  a  positive  action  by  the  government,  cost  is  simply  another 
method  of  measuring  special  benefit.^  This  has  been  overlooked, 
but  is  none  the  less  true.  In  all  competitive  private  enterprises 
the  benefit  to  the  individual  is  the  cost.  That  is,  the  amount 
which  the  individual  is  willing  to  pay— and  he  is  the  best  judge 
of  the  benefit  to  be  derived — is  the  price;  and  the  price  is  fixed 
ultimately  at  the  cost  of  production.  The  whole  modern  theory 
I  of  marginal  utility  as  the  regulator  of  price  is  simply  a  way  of 
1  stating  the  degree  of  special  benefit  to  the  individual;  and  the 
\  true  theory  of  price  confesses  that  marginal  utility  in  competitive 

^  Professor  Brentano  calls  attention  to  this  historical  fact.  Cf.  Faber, 
Die  Entstehung  des  Agrarschutzes  in  England,  p.  58.  Both  fail  to  notice 
the  points  made  in  the  text. 

2  The  cost  here  referred  to  is  at  once  the  cost  to  the  individual  and  the 
cost  to  the  government.  They  are  synonymous,  because  under  the  sup- 
position the  government  gives  its  services  for  cost. 


7-2/ 


-/a-ii4  -h 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     409 

enterprises  resolves  itself  ultimately  into  cost  of  production. 
The  benefit  to  the  individual,  therefore,  is  the  cost.  As  soon  as 
we  have  a  private  monopoly,  however,  the  benefit  to  the  individ- 
ual diminishes  in  proportion  to  the  sacrifice  he  is  compelled  to 
make  in  paying  more  than  the  cost  of  production;  and  the  excess 
of  price  over  the  normal  benefit  (as  measured  by  cost)  represents 
to  this  extent  a  tax  on  the  individual. 

The  same  is  true  of  governmental  action.  It  may,  and  often 
docs,  happen  that  a  government  is  not  actuated  by  motives  of 
profit,  but,  like  a  private  competitor,  sells  its  services  for  cost. 
Special  benefit  to  the  individual  and  cost  to  the  government  are  ] 
then  synonymous.  But  if  the  government  seeks  to  make  a  mo- 
nopoly profit  and  charges  more  than  cost,  then  as  before  the  spe- 
cial benefit  to  the  individual  may  be  said  relatively  to  diminish  as 
the  charges  increase,  until  finally  the  exaction  becomes  so  great 
that  the  special  benefit  is  merged  in  the  special  burden  and  the 
charge  becomes  not  a  counterpayment,  but  a  special  tax.  On 
the  other  hand,  the  government  may  decide  to  charge  less  than 
cost,  or  even  to  offer  its  services  gratuitously,  in  which  cases  the 
special  benefit  to  the  individual  may  gradually  be  swallowed  up 
in  the  common  benefit.  Here  the  very  reason  of  the  gratuitous 
service  is  that  no  special  benefit  exists,  or  that  it  results  only 
incidentally  from  general  state  action.  Thus  we  see  that  special 
benefit  to  the  individual  is  correlative  with  cost  to  the  govern- 
ment. If  the  charge  is  less  than  cost,  the  special  benefit  is  pro 
tanto  converted  into  a  conmion  benefit,  until  finally  there  is 
no  charge,  because  no  special  benefit.  If  the  charge  is  more  than 
cost,  the  special  benefit  is  pro  tanto  converted  into  a  special 
burden,  until  finally  the  charge  is  all  tax,  because  it  is  all  burden, 
and  no  special  benefit. 

This  point  of  view  helps  us  out  of  a  difficulty  as  to  the  line  of 
cleavage  between  fees  and  taxes.  Thus,  if  a  charge  is  made  for 
the  cost  of  judicial  process,  the  payment  is  a  fee,  because  of  the 
special  benefit  to  the  litigant.  If  no  charge  is  made,  the  cost 
of  the  process  must  be  defrayed  by  general  taxation;  and  the  liti- 
gant pays  his  share  in  general  taxes.  If  the  charge  is  so  arranged 
as  to  bring  in  a  considerable  net  revenue  to  the  government, 
the  payment  by  the  litigant  is  a  tax — ^not  a  general  tax  on  all 
taxpayers,  but  a  special  tax  on  litigants,  like  the  tax  on  lawsuits 
in  some  of  our  Southern  commonwealths.  The  character  of  fee 
disappears  only  secondarily  because  the  principle  of  cost  is  de- 
viated from,  but  primarily  because  the  special  benefit  to  the  Hti- 


■«■ 


li 


m 


!      I 


410 


yf 


ESSAYS  IN  TAXATION 


^ 


gant  is  converted  in  the  first  case  into  a  common  benefit  shared 
with  the  rest  of  the  community,  and  in  the  second  case  into  a 
special  burden.  The  failure  to  grasp  the  basis  of  this  distinction, 
which  IS  equally  true  of  other  fees,  has  confused  many  writers. 

A  third  distinction  between  fees  and  taxes  may  be  found  in  the 
conditions  attached  to  the  service  which  the  government  per- 
forms.   It  may  be  said  that  in  the  case  of  a  fee  the  government 
does  some  particular  thing  in  return,  while  in  the  case  of  a  tax 
It  gives  no  special  service.    The  particular  thing  done  by  the 
government  in  return  for  a  fee  may  be  either  the  display  of  some 
positive  energy,  as  in  furnishing  a  water  supply,  or  it  may  be  a 
simple  permission  to  do  something.    The  government  may  create 
direct  utilities,  or  it  may  permit  the  individual  to  create  utilities; 
but  in  each  case  it  demands  a  return  for  the  privilege.     In  the 
case  of  a  tax,  on  the  other  hand,  the  government  simply  refrains 
from  doing;  or,  if  it  does  anything  at  all,  does  it  only  as  a  general 
governmental  action.  This  distinction  applies  to  so-called  special 
taxes,  as  well  as  to  general  taxes;  for  even  in  the  case  of  a  special 
tax,  the  government  does  not  pledge  itself  to  do  any  special  thing 
for  the  individual  as  an  individual.    It  agrees  to  do  some  special 
thing  for  the  community  or  for  the  particular  class  involved,  but 
It  IS  wholly  immaterial  to  the  government  whether  the  individ- 
ual avails  himself  of  the  incidental  advantage  accruing  to  the 
class  as  a  whole.    Even  in  the  case  of  special  taxes  we  are  not 
confronted  with  the  principle  of  give  and  take,  or  quid  pro  quo 
as  regards  individuals.  ' 

A  further  distinction  that  has  been  very  fruitful  of  confu- 
sion is  that  between  the  business  licenses  or  fees,  and  business 
taxes.  The  legal  terms  apphed  to  such  payments  must  not  lead 
us  astray.  For  instance,  a  given  charge  levied  on  certain  retail 
businesses  is  called  in  various  American  states  a  fee,  a  license,  a 
hcense  fee,  a  license  tax,  a  special  tax,  a  specific  tax,  a  privilege 
tax  and  an  occupation  tax.^  A  certain  payment  exacted  from 
insurance  companies  is  called  indifferently  an  insurance  fee, 
an  insurance  license,  an  insurance  license  fee,  an  insurance  tax 
and  an  insurance  license  tax.  A  certain  payment  imposed  on 
some  corporations  is  called  variously  a  charter  fee,  a  bonus  on 
charters,  a  license  tax,  a  tax  on  certificates,  an  organization 
tax,  a  corporation  tax  and  even  a  corporate  franchise  tax.^ 

» Compare  my  monograph  on  Finance  Statistics  of  the  American  Cam. 
monweaUhi,  1889,  pp.  88-96. 
*  Compare  st*pra,  p.  216. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     411 

The  real  distinction  between  a  license  charge  and  a  business 
tax  is  that  the  non-payment  of  a  license  charge  normally  renders 
the  exercise  of  the  business  illegal,  while  the  non-payment  of  a 
business  tax  does  not  render  it  illegal.  More  broadly,  it  may 
be  stated  that  a  license  charge  is  a  condition  precedent,  while 
a  business  tax  is  a  condition  (if  a  condition  at  all)  subsequent. 

A  license  charge,  however,  may  be  either  a  license  fee  or 
a  license  tax;  ^  and  in  order  to  ascertain  which  it  is,  we  must 
fall' back  on  the  preceding  distinctions.  When  the  license 
is  imposed  to  cover  the  cost  of  regulation  or  to  meet  the  outlay 
incurred  for  some  improvement  of  special  advantage  to  the 
business,  it  may  truly  be  said  that  the  licensee  gets  a  special 
benefit  from  the  privilege,  a  special  benefit  measured  by  the 
cost.  The  charge  would  then,  as  in  the  common  case  of  cab 
licenses,  be  a  fee.  When,  however,  the  charge  for  the  license 
to  carry  on  a  business,  which  before  the  imposition  of  the  re- 
strictive law  was  open  to  anyone,  is  purposely  so  high  as  to 
bring  in  a  distinct  net  revenue  to  the  government  above  the  cost 
of  regulation,  we  can  no  longer  properly  speak  of  special  benefits 
to  the  licensee,  since  the  special  benefit  is  converted  into  a 
special  burden;  the  charge  is  then  no  longer  a  license  fee,  but  a 
license  tax.  This  is  the  case  with  some  of  the  so-called  license 
or  privilege  taxes  in  the  Southern  commonwealths.^  Finally, 
if  the  payment  is  not  conditional  upon  taking  out  a  license,  but 
is  assessed  on  certain  elements  of  the  business,  such  as  purchases, 
sales,  capital,  etc.,  as  in  the  French  patentes,  the  German  Ge- 
werbesteuer,  and  some  of  the  American  payments,  then  we  have 
not  hcense  taxes,  but  business  taxes,  because  the  condition  is  not 
precedent,  but  subsequent.  The  distinction  between  license 
tax^and  business  tax  is  one  of  condition  of  payment:  the  dis- 
tmction  between  license  fee  and  license  tax  is  one  of  benefit  and 
cost. 

There  is,  therefore,  some  tnith  at  the  basis  of  the  distinction 

^  This  distinction  is  overlooked  by  the  American  legal  writers.  Thus 
Black  on  Intoxicating  Liquors,  §  108,  makes  a  labored  argument  to  distin- 
guish taxation  from  license,  while  in  reality  he  is  distinguishing  license  fees 
on  the  one  hand  from  license  taxes  and  business  taxes  on  the  other. 

2  This  is  really  the  basis  of  the  decision  of  the  United  States  Supreme 
Court  in  the  case  of  Harmon  vs.  City  of  Chicago,  Supreme  Court  Reporter, 
xiii.,  no.  10,  p.  306  (Feb.  13,  1893).  A  license  charge  for  using  the  Illinois 
River  is  declared  to  be  a  tax,  and  in  conflict  with  the  interstate  commerce 
provision  of  the  constitution,  because  it  is  not  a  compensation  for  any 
specific  improvement.  In  the  latter  case  it  would  be  a  license  fee  or  toll, 
and  perfectly  valid,  as  decided  in  Huse  vs.  Glover,  119  U.  S.  543. 


412 


ESSAYS  IN  TAXATION 


m 


II 


drawn  by  the  American  judges  between  the  police  power  and  the 
taxing  power;  but  it  is  to  be  understood  in  a  sense  quite  different 
from  that  usually  adopted.     The  distinction  should  really  be 
drawn  between  a  license  fee  and  a  license  tax  on  the  one  hand 
and  between  a  license  tax  and  a  business  tax  on  the  other     The 
distinction  between  police  power  and  taxmg  power  is  not  valid 
because  from  the  broad  scientific  point  of  view  a  fee  may  be 
equally  an  exercise  of  the  taxing  power,  while  a  tax  is  none  the 
less  a  tax  because  it  is  regulative.    When  the  American  judges 
hold  that  a  license  fee  must  ''not  exceed  the  necessary  or  probable 
expense  of  issuing  the  license  and  of  inspecting  and  regulating 
the  business,"  '  they  are  drawing  the  line  between  license  fees 
and  hcense  taxes,  although  legal  complications  may  compel 
them  to  assert  that  it  is  a  distinction  between  the  police  power 
and  the  taxing  power.     For  instance,  the  decision  that  high 
liquor  licenses  are  not  taxes-a  decision  quite  untenable  from 
the  standpoint  of  public  financ^is  due  simply  to  certain  con- 
stitutional hmitations,  and  to  the  pohcy  of  upholding  such  pay- 
naents.    Liquor  licenses,  if  high  enough,  are  no  less  taxes  than 
the  Southern  license  or  privilege  taxes;  and  the  attempt  to 
call  them  license  fees,  in  order  to  uphold  them  under  the  police 
power,  IS  the  result  of  a  praiseworthy  but  palpable  legal  fiction. 
To  say,  as  Cooley  does,  that  a  high  liquor  license  is  only  a  license 
fee  covering  the  cost  of  regulation,  because  "it  is  reasonable 
to  take  mto  account  all  the  incidental  consequences  that  mav 
be  likely  to  subject  the  public  to  cost "  (such  as  prevention  of 
resulting  crime  and  disorder),  is  a  considerable  stretching  of  the 
term.    It  seems  impossible  to  state  how  much  of  pauperism 
and  crime  is  due  to  drink  and  how  much  to  other  causes 

The  truth  which  the  judges  have  vaguely  seen,  and  which 
they  have  attempted  to  realize  in  their  decisions,  then  is 
simply  this:  a  fee  is  a  payment  for  a  service  or  privilege  from 
which  a  special  measurable  benefit  is  derived,  and  normallv 
does  not  exceed  the  cost  of  the  service;  a  tax  is  a  paymentwhere 
the  special  benefit  is  merged  in  the  common  benefit,  or  is  con- 
verted into  a  burden.  A  fee  remains  a  fee,  whether  levied  under 
the  ta^ng  power  or  the  pohce  power;  and  a  tax  is  no  less  a  tax 
when  classified  under  the  police  power  than  when  put  under  the 
taxing  power. 

It  seems,  then,  that  writers  like  Professor  Bastable,  who 
desire  to  discard  fees  as  a  source  of  revenue  co-ordinate  with 

1  Ckwley,  Taxation,  p.  598. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     413 

taxes,  are  taking  a  step  backward,  and  are  abandoning  a  dis- 
tinction dating  back  at  least  to  Adam  Smith. 

It  is,  however,  useless  to  oppose  the  creation  of  a  class  of 
revenues  co-ordinate  with  taxes;  for,  even  if  we  disregard 
fees,  we  cannot  shut  our  eyes,  as  most  writers  have  done,  to  the 
existence  of  another  important  class  of  compulsory  revenues 
which  are  not  taxes.    These  are  known  as  special  assessments. 

IV.  Special  Assessments 

It  has  ab-eady  been  pointed  out  that  classification  of  pubHc 
revenues  has  depended  upon  historical  conditions.  Special 
assessments  are  a  comparatively  modern  and  a  specifically 
American  development,  although  the  germ  of  the  system  may 
be  found  in  the  RomaiL-fidict :  Construat  vias  publicas  unusguis- 
que  secundum  propriam  domum}  In  France  and  England  they 
have  been  so  rarejy_used  as  to  escape  detection,  although  of 
late  years  the  policy  of  introducing  the  principle  more  widely 
has  begun  to  be  discussed  in  England.^  In  Belgium  and  Ger- 
many they  have  been  introduced  in  the  past  few  decades,  and 
are  occasionally  mentioned  in  the  latter  country  under  the  head 
of  Beitrage.^  Even  so  recent  writers  as  Leroy-Beaulieu  and 
Bastable  ignore  them  completely,  in  the  earlier  editions  of  their 
books  on  public  finance.  Nowhere  do  we  find  any  adequate 
discussion  of  special  assessments  in  theory  or  in  practice,  or 
any  successful  attempt  to  correlate  them  with  other  forms  of 
compulsory  contributions^ 

*  Quoted  in  entirety  in  another  connection  by  Sax,  Die  Verkehrsmiitel  in 
Volks-  und  Staatswirthschaft,  i.,  p.  186. 

2  In  France  they  may  be  traced  back  to  1672  and  to  a  more  general  law 
of  1807,  known  as  the  law  on  "I'indemnit^  pour  payement  de  plus-value." 
But  only  about  twenty  to  twenty-five  cases  of  application  are  known.  Com- 
pare Aucoc,  Droit  Administratif,  ii.,  p.  732  et  seq.  For  the  earlier  cases,  see 
Clement,  La  Police  sous  Louis  XIV.,  p.  144. — For  England  see  infra, 
chap.  XV. 

^  In  Prussia  they  are  legally  known  as  Interessenienzuschusse.  Compare 
Leidig,  Preussisches  Stadtrecht,  p.  375,  and  Loening,  Verwaliungsrecht,  p. 
580.  Other  forms  of  special  assessments  are  known  as  Deichbeitrdge,  and  in 
Baden  as  Soziallasten.  The  whole  system  seems  to  have  received  a  greater 
development  in  Belgium  than  anywhere  else  in  Europe,  and  yet  it  has  not 
been  noticed  at  all.  The  Belgian,  Denis,  does  not  mention  it  in  his  recent 
work,  Ulmpot.  The  details  of  the  system  may,  however,  be  found  in  Lee- 
man's  Des  Impositions  Communalcs  en  Belgique,  2d  edition,  chape,  v.-x.  He 
calls  them  taxes,  but  confuses  them  continually  with  taxes  proper,  includ- 
ing special  taxes. 


H 


^^^ft 


414 


ESSAYS  IN  TAXATION 


f„;f  ?  ^«™an  who  treats  of  public  finance  as  a  whole  can 

"actuaUrS     T    f^l  '"r^"''^  "^  ^Pecial  alessmen" 
dtv  in  i«Qi  •■  /"  ^"^^  "•''y  ^^"^  examples:  in  New  York 

la^er  th!n  that  raLdtyC.^  S^'l^STavT  bee^fiS 
with  htigatmn  respecting  special  a^essments,  an^certab  val 
uable  principles  have  been  slowly  evolved.     Yet  no  one  ht 

S'itn'toT*"'*  '  ^'^r"^  °^  ^P--'  asseslTntror  t^ 

S  tJe  ttnrv  .r  P'-^'  P'*^"  '"  *''"  "^*  °f  Public  revenues. 
1  nus  the  theory  of  special  assessments  has  not  been  worked  out 

portant,  and  it  has  not  been  worked  out  in  America   because 
there  have  been  almost  no  American  theorists  inJuMc  finance  t 

A  special  assessment  may  be  defined  as  n  r-nVnr,,  r^ 
tribution,  levied  in  proportL  to  the  special  St    dTri^ed" 

aertaken  in  the  public  interest.  When  a  new  street  is  or^np. 
for  instance,    t  is  deemed  equitable  that  the  Sense  should 
T    ^^'^^"fy  ^"^^  ^y  *»>«  ^hole  community    but  that    t 

reaTetil'^'T' '''  """^  "'  '"^  "''^'^  ''^  '"^^  ow^ek  of  abutting 
real  estate,  whose  property  receives  an  undeniable  benefit  if 

the  immediate  enhancement  of  value.    The  advantages  of  the 
particular  govermnent  services  accrue  in  great  part  toThe  nrin 
erty  owners;  and  it  is  therefore  right  thalthey  sho^d  bLr  the" 
burden  in  proportion  to  the  advantages  received      Khont 

fn'New  Yn  t ''r^"^'*'^^^^^*^'"'  we  may  say  that,  be^Jn^ 
m  New  York  m  the  seventeenth  centuiy,  it  has  been  w^l  niVh 

umversally  adopted  in  the  United  States     Its  o^mtTon  elnds 

to  improvements  like  the  following:  opening,  lajw  out^S 

paving  and  repaving,  planking  and  curbing  the  streets   snrif' 

Shf  an7  ""*'  '""*'''  ".•"'»i-«"g  them  with  gi  SdeS 
light,  and  even  ornamenting  them  with  shade-trees-  constn.rtin^ 

atd^ferp^  nr '  -^r'^^--^^^  layinTwrctndS 
ana  water  pipes,  bettenng  waterways  and  dredgine  rivers- 
laying  out  and  developing  public  parks,  squares  and'dXeri^^^ 

RoJS  till  'X^^Xtn.Z^r'^'''^  L"'"^^^'  ^-  Victor 
Special  aLssZu^!":' slJy^nM^^^  ""^  T^^^^^'  ^" 

vol.  ii,  no.  3  of  the  Columbia  TlnivPi^TfrST^^'.  '^^'''^  appeared  as 
Public  Law,  2d  ed  1898  This  mZ!.^  Studies  m  Hutory,  Economics  ami 
ment  of  th^  whl'subjec^^i^TtS^  T.^T  a  compi^hensive  treat- 
isnowthecMef  authority  in  the  opt  ^    '       '"''^'^^  "^^  theoretical,  and 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     415 

all  these  cases  the  entire  expense,  or  a  certain  portion  of  it,  is  met 
not  by  general  taxes,  but  by  special  assessments.  We  are 
here  to  consider  the  theory  of  special  assessments. 

In  the  first  place,  special  assessments  represent  an  exercise 
of  thfiJa^hig  power.  In  the  early  days  various  attempts  were 
made  to  justif^hem  under  the  power  of  eminent  domain  and 
under  the  police  power;  but  in  ISSla  leading  New  York  case^ 
swept  away  all  these  refinements,  and  decided  that  special 
assessments  were  a  constitutional  exercise  of  the  taxing  power. 
The  reasoning  of  Judge  Ruggles  in  that  case  is  so  convincing 
as  to  need  no  comment  or  defence;  and  the  whole  development 
in  the  United  States  has  since  proceeded  on  the  line  he  laid  down. 

In  a  special  assessment  the  element  of  public  purpose  must 
always  be  present;  for  if  levied  solely  for  private  purpose  it 
would  be  an  act  of  confiscation,  not  an  exercise  of  the  taxing 
power.  Again,  a  special  assessment  must  be  capable  of  appor- 
tionment: there  must  be  an  assessment  district,  and  the  assess- 
ment must  not  be  arbitrary.  The  countless  cases  which  enforce 
these  points  show,  in  short,  that  special  assessments,  like  fees, 
are  an  exercise  of  the  taxing  power. 

Special  assessments,  like  fees,  are  not,  however,  taxes  in  the 
ordinary  or  narrower  sense.  Taxes,  as  we  know,  are  compulsory 
contributions  levied  to  defray  the  expenses  incurred  in  the  com- 
mon interest,  without  any  reference  to  particular  advantages 
accruing  to  the  taxpayer;  but  in  special  assessments,  as  in  fees, 
the  services  for  which  the  expenses  are  incurred  redound  to  the 
particular  benefit  of -the  individual.  The  primary  test  of  a  tax 
is  that  it  imposes  a  common  burden :  the  primary  test  of  a  special 
assessment  is  that  it  implies  a  special  benefit.  From  this  one 
great  distinction  flow  all  the  others,  which  may  be  summed  up 
as  follows : — 

First.  In  a  special  assessment  the  special  benefit  to  the  indi- 
vidual is  measurable.  In  a  tax  the  special  benefit  does  not  exist, 
or,  if  it  exists  at  all,  results  incidentally  from  the  individual's 
share  in  the  common  benefit;  it  is  not  separately  measurable. 
No  one,  perhaps,  will  be  apt  to  confound  a  special  assessment 
with  a  general  tax;  but  there  is  also  a  clear  line  of  distinction 
between  a  special  assessment  and  a  special  tax.    An  adequate 

»  People  vs.  Brooklyn,  4  N.  Y.  419.  Some  of  Judge  Ruggles'  obiter  dicta 
on  the  principles  of  taxation  are  open  to  serious  question.  But  as  they 
have  really  nothing  to  do  with  the  point  decided  in  the  case,  we  pass  them 
by. 


416 


ESSAYS  IN  TAXATION 


cx 


j^^  \. 


I* 


'•I 


discussion  of  the  relation  between  a  general  tax  and  a  special 
tax  belongs  to  the  question  of  the  sub-classification  of  taxes 
m  particular,  and  would  lead  us  too  far  astray  here.    But  we 
can  say  at  all  events  this:  a  general  tax,  like  the  ordinary  state 
or  local  tax  m  America,  is  not  levied  for  any  definite,  particular 
expenditure,  but  is  assessed  for  general  governmental  purposes- 
a  special  tax,  like  the  English  local  rates  or  the  local  taxes  in 
some  American  states,  like  New  Jersey,  is  a^essed  for  the 
^   accomplishment  of  some  special  task  to  which  the  government 
IS  pledged,  and  is  levied  on  a  definite  section  of  the  population  ^ 
^      1  he  police  rate,  the  sewer  rate,  the  poor  rate,  the  lighting  rate 
are  each  levied  for  the  special  purpose  and  on  the  definite  class 
of  taxables  subject  to  the  rate.    But  this  special  tax  is  none  the 
less  a  veritable  tax;  it  is  levied  for  a  public  purpose,  it  is  assessed 
on  what  IS  deemed  to  be  the  faculty  or  "  means  -  of  the  taxpayer  • 
and  there  are  no  particular  benefits  accruing  to  him  as  an  indi- 
vidual    Even  if  he  does  perchance  derive  a  benefit,  it  is  not  a 
special,  measurable,  individual  benefit  apart  from  the  common 
benefit  that  the  other  members  of  the  class  derive:  it  is  simply  an 
mcidental  result  of  his  share  in  the  common  benefit.    In  the 
special  assessment,  on  the  other  hand,  the  special  individual 
benefit  is  distinctly  measurable  and  forms  the  ba^is  of  the  assess- 
ment.   The  English  local  rates,  for  instance,  might  seem  to  be 
m  no  wise  distinguishable  from  the  American  assessments.    It  is 
a  clear  pnnciple  of  the  English  system  of  local  rates,  however, 
that    the  ^i  measure  of  the  benefit  is  not  the  measure  of  the 
liability  to  be  taxed,"  while  the  reverse  is  true  in  the  American 
systena  of  special  assessments.    In  other  words,  the  test  of  the 
specia  assessment  is  measurable  special  benefit:  the  test  of  the 
special  tax  is  special  taxable  capacity  or  faculty,  just  as  the 
test  of  the  general  tax  is  general  taxable  capacity  or  faculty. 
Ihe  distinction  is  quite  clear;  yet  the  few  writers  who  have 
spoken  of  special  taxes  at  all  have  ahnost  universally  confused 
tnem  with  special  assessments. 

Secondly.  Taxes  may  be  proportional  to  property,  or  to  in- 
come, or  to  expense,  or  to  any  other  test  of  faculty,  or  they  mav 
be  progressive  rather  than  proportional;  special  assessments 
can  never  be  progressive,  but  must  always  be  proportional  to 
benefits.    This  is  the  recognized  principle  in  American  juris- 

»  These  taxes  must  of  course  not  be  confounded  with  the  so-caUed  "soe- 
eial  taxes-  m  some  of  the  Southern  commonwealths,  which^re  k^w^^ 
Ucense  or  privilege  or  business  taxes  in  the  other  commonwealths! 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     417 

prudence;  and  the  only  difficulty  now  is  to  decide  what  is  to  be 
regarded  as  the  most  equitable  standard  for  the  measurement 
of  benefit.  Acreage,  frontage,  value,  superficial  area  of  the  prop- 
erty— all  these  have  been  upheld  as  proper  guides  to  apportion- 
ment, and  as  constitutional  tests  of  presumptive  special  bene- 
fit. Not  only  are  special  assessments  void  when  there  is  no 
special  benefit;  they  are  also  voidable  when  the  charge  exceeds 
the  speciall)enefit;  ^  for  to  charge  more  than  the  exact  benefit 
would  be  equivalent  to  taking  private  property  without  due  com- 
pensation. In  the  special  assessment  there  must  be  compensa- 
tion; in  the  tax  there  is  no  question  of  compensation.  The  only 
matter  in  dispute  in  the  American  courts  is  whether  the  special 
benefit  need  be  actual  or  may  be  presumptive;  the  general  tend- 
ency of  the  decisions  is  to  make  the  legislative  and  administra- 
tive discretion  rather  v/ide.^ 

Thirdly.  Special  assessments  are  confined  to  specific  local 
improvements,  while  the  sphere  within  which  taxes  operate  is 
in  this  respect  unlimited. 

Fourthly.  For  a  special  assessment  the  government  performs 
a  definite,  particular  acflh  return;  it  is  an  instance  of  service 
and~counter-service,  of  give  and  take.  For  a  tax  the  government 
does  not  pledge  itself  to  do  a  particular  thing  for  the  particular 
individual  in  return.  The  reasoning  here  is  precisely  the  same 
as  that  adduced  above  in  discussing  the  distinction  between 
taxes  and  fees.  A  special  assessment  is  here  on  exactly  the  same 
footing  as  a  fee. 

Fifthly.  Taxation  is  resorted  to  in  order  to  defray  the  running 
expenses  of  government,  and  to  effect  in  time  the  amortization 
of  the  debt;  while  the  object  of  special  assessments  is  in  the  main 
to  provide  for  the  capital  account — to  increase,  as  it  were,  the 
permanent  plant  of  the  community.^ 

The  distinction  between  special  asses£!iients  and  taxes  has 
been  widely  recognized  in  American  jurisprudence;  and  the 
constitutional  limitations  applied  to  taxation  have  generally 
been  declared  inappHcable  to  special  assessments.  As  Cooley 
puts  it,  "The  overwhelming  weight  of  authority  is  in  favor  of 
the  position  that  all  such  provisions  for  equality  and  uniformity 

^  Cf.  the  celebrated  Agens  cases  in  New  Jersey.  State  vs.  Newark,  37 
N.  J.  L.  415;  Bogcrt  vs.  Elizabeth,  27  N.  J.  Eq.  508. 

2  Cf.  Matter  of  Church,  92  N.  Y.  6;  Allen  vs.  Drew,  44  Vt.  174,  and 
other  cases  cited  in  Rosewater,  Special  Assessments. 

'  Only  very  rarely  is  there  a  departure  from  this  rule,  as,  e.  g.  where  the 
cost  of  sprinkling  the  streets  is  occasionally  defrayed  by  special  assessments. 


418 


li  f 


ESSAYS  IN  TAXATION 


m  taxation  by  value  have  no  application  to  special  assessments." 
toemptions  from  taxation,  moreover,  do  not  imply  exemptions 
from  special  assessments.    Special  assessments  are  none  the  less 
a  distinct  class  because  in  some  laws  they  are  called  taxes     In 
some  cases,  in  their  anxiety  to  uphold  the  distinction,  the  same 
courts  mterpret  the  word  "assessment'^  in  the  phrase  "uniform 
rate  of  assessment  and  taxation"  sometimes  in  one  way,  some- 
times m  the  other.    That  is,  when  special  assessments  must  be 
put  under  the  taxing  power  in  order  to  be  upheld,  "assessment " 
is  held  to  be  used  in  the  general  sense,  and  to  mean  taxation; 
when  in  other  cases  special  assessments  can  be  upheld  only  by 
being  distinguished  from  taxes,  "assessment"  is  held  to  be  used 
in  the  technical  sense,  and  to  mean  something  different  from 
taxation.    All  the  ingenuity  of  the  American  judges  has  been 
needed  to  attain  the  result  now  achieved— the  marked  distinc- 
tion between  special  assessments  and  taxes;  ^  but  their  efforts 
have  been  sensible,  and  the  result  is  in  accord  with  the  teaching 
of  the  science  of  finance. 

Special  assessments  hence  are  not  taxes.    They  differ  from 
taxes  in  the  same  way  that  fees  differ  from  taxes,  since  both  fees 
and  special  assessments  rest  on  the  doctrine  of  equivalents    Fees 
special  assessments  and  taxes  have  points  in  common  in  that 
they  are  all  manifestations  of  the  taxing  power.*  Fees  and  special 

/One  recent  case  is  especially  noteworthy  as  illustrative  of  ingenious 
distinction.    The  general  trend  of  authority,  as  we  have  shown,  is  to  give  a 
wide  discretion,  and  to  uphold  assessments  per  front  foot  as  a  good  presump- 
tive test  of  special  benefit.    Yet  in  the  celebrated  Illinois  case  of  Chicago  v^. 
Lamed  34  111  203  (1864),  the  court,  held  that  the  provisions  of  the  coStituI 
tion  as  to  uniformity  and  equality  of  taxation  were  unusually  stringent  and 
were  applicable  also  to  special  a^essments.    The  court  was  really  mistaken 
here,  as  the  Illinois  constitution  did  not  diflfer  from  many  others  where  the 
contrary  interpretation  was  adopted.    Still,  as  a  consequence  of  their  view 
a^essments  could  be  ma^e  on  each  lot  only  up  to  benefit  actuallv  proved' 
while  the  remainder  of  the  cost  would  have  to  be  defrayed  by  general  taxes' 
Assessment  by  front  foot  was  held  to  be  invalid.     Yet  later  the  courts 
evaded  this  case  by  a  very  fine  distinction.    The  constitution  of  1870  gave 
local  authorities  the  right  to  levy  "special  taxes  for  local  improvement;" 
and  m  White  vs.  People,  94  111.  613,  the  court  held  that  a  special  tax  was  not 
a  special  assessment,  and  that  a  special  tax  might  exceed  the  actual  benefits 
to  the  particular  lot.    An  assessment  by  front  foot  is  hence  valid,  and  the 
system  in  Illinois  to-day  is  the  same  as  in  other  states.    Of  course  the  "spe- 
cial tax    of  the  Illmois  constitution  is  simply  the  "special  assessment"  of 
other  states,  and  is  even  known  by  the  latter  name  in  Illinois  itself     There 
IS,  as  we  have  seen,  a  distinction  between  a  special  tax  and  a  special  assess- 
ment; but  It  is  not  the  distinction  drawn  by  the  Illinois  court 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     419 

assessments  have  additional  points  in  common,  which  they  both 
possess  in  distinction  from  taxes.  But,  finally,  fees  and  special 
assessments  differ  in  some  respects  from  each  other.  We  have 
distinguished  special  assessments  from  taxes;  it  remains  to 
distinguish  themjrom  fees. 

It  may,  indeed,  be  claimed  that  there  is  no  distinction,  and 
that  special  assessments  simply  constitute  a  sub-class  of  fees. 
It  is  true,  as  has  just  been  pointed  out,  that  what  characterizes 
taxes  proper  as  against  the  other  manifestations  of  the  taxing 
power  is  general  benefit  as  against  measurable  special  benefit. 
If  we  name  the  first  kind  taxes,  we  might  indeed  give  to  the  sec- 
ond kind  some  generic  name.  Special  assessments  would  then 
be  simply  a  distinct  sub-class.  But  they  are  so  extremely  impor- 
tant and  so  far  overshadow  all  the  other  cases  of  special  benefit 
taken  together,  that  it  seems  advisable  to  put  them  into  a  sepa- 
rate category.  Especially  in  the  United  States,  where  the  judges 
are  just  beginning  to  wrestle  with  the  actual  problems,  it  would 
tend  to  confuse  rather  than  to  clarify,  if  we  put  special  assess- 
ments and  cab  licenses,  for  instance,  into  the  same  category. 
Let  us  then  attempt  to  point  out  in  what  respects  special  assess- 
ments differ  from  fees. 

In  the  first  place,  special  assessments  are  levied  only  for 
specific  local  improvements :  fees  may  be  levied  for  any  services. 
The  field  of  operation  of  special  assessments  is  restricted;  that 
of  fees  is  unrestricted. 

Secondly,  special  assessments  are  paid  once  and  for  all;  fees  are 
paid  periodically,  according  to  each  successive  service.  The 
only  qualifications  to  this  statement  are  that  special  assessments 
may,  in  a  few  cases,  be  spread  over  a  longer  period,  and  may  then 
be  payable  by  regular  instalments;  ^  while,  on  the  other  hand, 
a  fee  is  of  course  paid  only  once  if  the  service  is  demanded 
only  once,  as  in  the  case  of  a  marriage  fee.  That,  however, 
does  not  invalidate  the  distinction.  In  the  special  assessment 
the  payment  is  capitalized  in  a  lump  sum,  payable  generally  at 
once,  but  occasionally  by  instalments;  in  the  fee,  on  the  other 
hand,  the  payment  is,  so  to  speak,  fragmentary  and  irregular. 
In  a  given  case  there  may  be  a  choice  of  methods.    For  instance, 

*  Cf,  the  New  York  Law  of  1912,  chap.  372,  which  provides  that  if  the 
assessment  exceeds  five  per  cent  of  the  tax  valuation  for  the  preceding  year, 
the  collector  shall  di\'ide  the  assessment  into  ten  instalments,  as  nearly 
equal  as  may  be.  Each  instalment  after  the  first  is  to  bear  five  per  cent 
interest  until  due,  and  seven  per  cent  thereafter  until  paid. 


fltfli 


420 


ESSAYS  IN  TAXATION- 


|l 


I 


mi 


• 

in  constructing  a  bridge,  the  cost  may  be  defrayed  either  by  levy- 
ing a  special  assessment  on  the  owners  of  the  abutting  property 
or  by  charging  tolls  on  those  using  the  bridge,  who  are  presum- 
ably m  great  part  also  the  owners  of  abutting  property  or  their 
friends  and  dependents.  If  the  benefits  redound  in  greater  part 
to  these  property  owners,  the  cost  should  be  paid  by  a  special 
a^essment;  if  the  benefits  redound  in  greater  part  to  individuals 
who  are  not  property  owners,  the  cost  should  be  paid  by  a  fee 
(toll) ;  if  the  benefits  are  so  wide-spread  that  the  whole  commu- 
nity is  almost  equally  interested,  the  cost  should  be  paid  by 
neither  a  special  assessment  nor  a  fee,  but  by  a  general  tax. 

'^J^ly^  a  fee  is  levied  on  an  individual  as  such:  a  special 
assessment  is  levied  on  an  individual  as  a  member  of  a  class 
1  hat  IS,  m  the  case  of  special  assessments  there  must  always  be 
an  assessment  area  ever  which  the  whole  assessment  is  levied 
to  be  then  further  distributed  according  to  a  definite  rule  of 
apportionment.  It  is,  for  instance,  a  settled  rule  of  the  American 
law,  that  m  assessing  benefits  the  assessors  cannot  restrict 
themselves  to  the  cost  of  the  improvement  in  front  of  a  partic- 
ular lot.  In  the  case  of  a  fee,  on  the  other  hand,  the  govern- 
ment looks  not  to  a  class  or  to  an  area,  but  to  the  seoarate 
individual. 

Fourthly,  a  special  assessment  must  always  involve  a  benefit 
to  real  estate:  a  fee  is  paid  for  a  service  which  may  benefit  other 
elements  than  real  estate,  such  as  personal  property,  or  other 
attributes  of  the  individual  without  any  reference  to  property 

There  is  one  further  distinction,  which,  however,  is  more 
imaginary  than  real.     It  might  be  maintained  that  special 
assessments  are  like  direct  taxes,  and  fees  like  indirect  taxes 
in  the  sense  of  taxes  on  consumption  or  on  acts  a£d755Siunica^ 
tion,  because  the  former  are  compulsory  and  the  lattervoluntary 
But  this  distinction  is  badly  expressed,  and  really  untenable" 
tor,  notwithstanding  the  contrary  statement,  wEfch  has  fre- 
quently been  made,  indirect  taxes  are  not  a  whit  more  voluntary 
than  direct  taxes.    It  is  true  that  if  a  man  chooses  to  go  without 
tobacco  he  may  escape  the  tobacco  tax;  but  it  is  equally  true 
that  If  a  man  chooses  to  go  without  certain  kinds  of  property 
or  income,  he  may  escape  to  that  extent  the  property  tax  or 
the  income  tax.    Indirect  as  well  as  direct  tajces  are  compulsory 
not  voluntary,  contributions.    In  the  same  way,  there  is  no  truth 
m  the  statement  that  a  fee  is  voluntary  and  a  special  asi^^S^ 
>■  Ex  parie  Mayor  of  Albany,  23  Wend.  277. 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     421 

compulsory.  It  is  true  that  we  do  not  need  to  pay  a  peddler's 
license  fee  if  we  do  not  care  to  peddle;  but,  on  the  other  hand, 
we  do  not  need  to  pay  a  special  assessment  if  we  do  not  care  to 
own  the  land.  Further,  when  the  payment  of  a  fee  is  connected 
with  necessary  every-day  transactions,  as  are  mortgage  regis- 
trations fees  or  marriage  fees,  there  can  be  no  question  of  the 
compulsory  nature  of  the  transaction.  Birth  and  death  cannot 
well  be  termed  voluntary  actions;  yet  a  registration  fee  for  a 
birth  or  death  certificate  does  not  differ  in  character  from  any 
other  fee.  Fees  and  special  assessments,  indirect  and  direct 
taxes,  are  all  compulsory  contributions.^ 

It  is  clear,  then,  that  there  is  a  line  of  distinction  between 
fees  and  special  assessments,  although  not  so  sharp  as  between 
fees  and  special  assessments  on  the  one  hand  and  taxes  on  the 
other.  There  is  no  danger  of  confusing  them  in  practice;  yet 
very  little  has  been  done  to  differentiate  them  in  theory.  Even 
Wagner,  though  compelled  in  the  last  edition  of  his  work  to 
recognize  the  existence  of  "Beitrdge,"  mentions  them  in  a 
few  "lines  as  merely  an  unimportant  addendum  to  fees.  Of 
course,  it  would  be  easy  to  follow  Professor  Bastable's  example, 
and  deny  the  existence  of  fees  as  a  separate  class,  in  order  to 
avoid  the  ''creation  of  a  distinct  group  of  state  receipts  co- 
ordinate with  that  derived  from  taxation."  ^  But  even  he, 
when  confronted  with  the  existence  of  special  assessments, 
will  have  to  revise  his  classification,  and  create  at  least  one 
"distinct  group  co-ordinate  with"  taxes.  And  if  this  one 
group  is  separated  from  taxes,  it  will  be  difficult  to  refuse  to 
cut  off  another  group,  for  the  arguments  that  apply  in  the  one 
case  apply  equally  well  in  the  other.  ^ 

V.  Prices 

We  now  come  to  a  final  problem  which  has  given  rise  to 
considerable  difficulty.  Where  shall  we  class  the  payments 
made  for  services  rendered  by  certain  governmental  enter- 
prises, like  canals,  postoffice,  telegraph  and  railroads?  Are 
they  taxes,  are  they  fees,  are  they  compulsory  payments  at 

^  Neumann,  who  is  the  only  writer  to  attempt  a  distinction  between  fees 
and  special  assessments,  makes  it  turn  on  a  very  dubious  distinction  be- 
tween direct  and  indirect  taxes.  LHe  Steuer  und  das  offentliche  Interesse,  pp. 
327,  334. 

2  Public  Finance,  p.  221. 

'  Professor  Plehn,  Introduction  to  Public  Finance,  New  York,  3d  ed.,  1909, 
p.  354,  prefers  to  consider  special  assessments  as  a  class  of  fees.    On  the  other 


\i. 


m 


w 


422 


ESSAYS  IN  TAXATION 


I 


r 


li^i 


all,  or  are  they  not  rather  to  be  called  prices,  and  classed  with 
the  contractual  income  of  the  state? 

Some  writers  say  that  if  the  government  goes  into  a  public  bus- 
iness, like  the  postoffice,  the  charges  are  compulsory;  but  that  if 
it  goes  into  a  private  business,  like  a  shoe  factory  or  a  coal  yard, 
the  revenue  belongs  to  the  industrial  domain.  This  seems  to  be  a 
decided  mistake;  for  there  is  no  such  sharp  line  of  demarcation 
between  a  naturally  public  and  a  naturally  private  business. 
Everything  depends  on  the  view  taken  for  the  time  being  as  to 
the  policy  of  governmental  interference.  The  postoffice  is  every- 
where in  the  hands  of  the  government,  simply  because  the 
enterprise  arose  at  a  time  when  there  was  no  dispute  over  the 
policy.  The  telegraph,  the  telephone,  and  still  more  the  rail- 
road are  controlled  by  the  government  in  some  countries,  and 
by  individuals  in  other  countries,  because  these  industries 
developed  after  the  discussion  as  to  the  limits  of  governmental 
interference  arose.  Where  shall  we  put  the  gas  industry,  which 
in  some  municipalities  is  a  pubhc,  and  in  others  a  private, 
business?  Where  shall  we  put  the  water-supply  and  the  street- 
railway  business?  Some  countries  have  monopolies  of  the 
manufacture  of  salt  and  of  tobacco,  which  are  then  regarded 
as  modes  of  taxing  the  people  who  use  salt  and  tobacco.  Would 
there  be  any  difference  in  principle  if  the  government  went 
into  the  coal  business  or  into  the  shoe  business,  in  order  to 
tax  the  people  using  coal  or  shoes?  It  might  indeed  be  very 
bad  policy  for  the  government  to  extend  its  functions;  but 
there  is  no  natural  and  immutable  line  of  cleavage  between 
a  pubUc  and  a  private  business,  between  a  monopoly  of  tobacco 
and  a  monopoly  of  bread  or  of  iron.  The  limit  is  always  fixed  in 
accordance  with  temporary  public  feeling  as  to  the  proper  social 
policy;  but  the  question  as  to  how  far  vital  public  interests 
are  at  stake  has  been  answered,  and  will  always  be  answered, 
differently  in  different  countries  and  in  different  ages. 

The  distinction,  therefore,  is  not,  as  most  writers  have  as- 
sumed, dependent  on  the  nature  of  the  enterprise.^    As  a  matter 

hand,  my  contention  has  now  been  accepted  by  Leroy-Beaulieu,  TraitS 
de  la  science  des  finances,  6th  ed.,  1899,  vol.  i.,  chap,  vii.;  Graziani,  Istitu- 
zioni  di  Sciema  delle  Finanze,  2d  ed.,  1911,  p.  193;  Nicholson,  Principles 
of  Political  Economy,  iii.,  282;  H.  C.  Adams,  The  Science  of  Finance,  1899, 
p.  227,  and  T.  K.  Urdahl,  The  Fee  System  in  the  U.  S.,  1898,  p.  60. 

^  For  instance,  Wagner  classes  telegraph  and  postal  charges  among  fees, 
railroad  charges  among  industrial  revenues.  Schall  limits  fees  to  services 
for ' '  essential  state  purposes ' '  {wesentliche  Staatszwecken) .   Compare  Schon- 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     423 

of  fact,  the  payment  for  the  same  service  may  be  a  price  in 
one  state,  a  fee  in  a  second,  or  a  tax  in  a  third.  The  explana- 
tion of  the  difficulty  is  to  be  sought  in  an  elaboration  of  the 
very  principle  which  has  just  been  employed  to  show  the  dif- 
ference between  special  assessments,  fees  and  taxes.  In  other 
words,  the  controlling,  consideration  in  the  classification  of 
public  revenues  is  not  so  much  the  conditions  attending  the 
action  of  government  or  the  kinds  of  business  conducted  by 
the  government  as  the  economic  relations  existing  between  the 
individual  and  the  government. 

Let  us  attempt  to  make  this  clear  by  taking  up  in  turn  the 
various  classes  of  revenue. 

The  simplest  case  arises  when  government  decides  to  go 
into  a  purely  private  business.  The  government  sees  private 
individuals  making  money  out  of  certain  occupations,  and 
considers  why  it  also  should  not  do  likewise.  It  therefore 
enters  upon  the  business,  and  conducts  it  in  precisely  the  same 
way  as  would  an  individual.  Such  instances  were  very  common 
in  former  times,  when  governments  carried  on  all  kinds  of 
private  occupations,  such  as  manufacturing  pottery,  loaning 
money,  or  conducting  commercial  enterprises;  but  in  modern 
times  this  has  become  less  usual.  Many  states,  nevertheless, 
still  own  real  estate,  either  renting  or  utilizing  it  and  seUing 
the  produce  in  the  open  market;  some  states  still  carry  on  a 
banking  business;  and  others  deal  in  commodities,  like  Holland 
in  tobacco.  Chili  in  guano,  and  India  in  opium.  In  all  such 
cases  the  chief  consideration  with  the  government  is  fiscal; 
and  the  charges  are  precisely  the  same  as  would  be  made  by 
private  individuals.  In  fixing  the  price,  the  government  is 
actuated  by  the  same  motives  that  obtain  in  private  business, 
whether  the  business  be  competitive  or  monopofistic.  It  is 
immaterial  to  the  purchaser  whether  he  buys  from  the  state  or 
from  a  private  person;  for  he  has  to  pay  the  same  in  each  case. 
The  commodity  or  service  supplies  his  own  private  wants, 
and  there  is  nothing  public  about  the  transaction  except  the 
mere  accident  that  the  seller  is  a  pubfic  agent  rather  than  a  pri- 
vate person.  The  charge  made  by  the  government  is  therefore 
a  ^iwisi-private  price;' it  is  a  purely  contractual  payment,  resting 

berg's  Handbuch  der  politischen  Oekonornie,  iii.  (3d  edition),  p.  98.  Roscher 
(Finamwissenschaft,  p.  22)  and  Vocke  (Die  Abgaben,  Auflagen  und  die 
Sieuer,  pp.  223-5r)5)  also  except  payments  for  post,  telegraph  and  railroads 
from  the  category  of  fees. 


''  I 


424 


ESSAYS  IN  TAXATION 


I   ! 


Iiiii 


I 


h 


on  an  agreement  between  the  government  and  the  purchaser 
The  special  benefit  which  the  individual  receives  is  to  him  the 
controlHng  consideration;  and  the  matter  of  general  interest 
or  of  public  purpose  is  only  an  incidental  matter. 

We  now  come  to  the  next  case,  where  the  government  de- 
cides, for  special  reasons  not  purely  fiscal,  to  enter  upon  certain 
enterprises  which  have  more  or  less  of  an  industrial  nature 
It  is  found  by  experience  that  the  retention  of  these  enterprises 
in  unregulated  private  hands  is  not  thoroughly  satisfactory 
Ihe  government,  therefore,  either  leaves  these  occupations  to 
private  imtiative,  but  subject  to  careful  regulation,  or  takes 
such  business  into  its  own  hands.  The  reason  for  interference 
is  not  public  gain,  but  public  policy;  it  is  now  a  matter  of 
common  mterest,  and  no  longer  purely  and  solely  of  private 
interest. 

The  familiar  examples  of  such  enterprises  are  the  postoffice 
the  telegraph,  the  telephone,  the  railway,  the  water,  gas  and 
electnc-light  supply.  These  are  often  called  economic  monop- 
oUes,  because  in  them  through  the  working  of  economic  forces 
competition  tends  to  become  entirely  inoperative.  In  most 
cases,  too,  they  can  be  carried  on  only  in  virtue  of  some  priv- 
ilege or  franchise  conferred  by  the  government.  The  public 
interest  is  therefore  admittedly  strong;  and  whether  it  takes 
the  shape  of  governmental  regulation  or  of  governmental  owner- 
ship is,  for  our  special  purpose,  immaterial. 

Let  us  assume  the  latter  case.  The  problem  then  arises* 
What  IS  the  nature  of  the  charge  made  by  the  government 
for  the  service  or  for  the  commodity  which  results  from  the 
operation  of  these  enterprises? 

The  chief  point  is  still  the  private  interest  of  the  individual. 
He  buys  his  gas  or  his  telegraph  service  to  satisfy  his  private 
wants,  very  much  as  he  would  buy  it  from  any  individual  or 
corporation.  But  a  new  element  has  entered,— the  element 
of  public  interest,  the  satisfaction  of  the  wants  which  one  feels 
as  a  member  of  the  community.  The  very  reason  why  these 
enterprises  have  been  made  government  enterprises  is  that 
the  individuals  who  compose  the  community  feel  that  they 
have  a  common,  public  interest  in  the  assumption  of  the  business 
by  the  government.  They  believe  in  municipal  water-supply, 
for  instance,  because  they  are  convinced  for  various  reasons 
that  this  business  ought  not  to  be  left  in  private  hands.  The 
government,  indeed,  may  make  a  charge,  which  is  undoubtedly 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     425 

a  price  paid  by  the  individual;  but  it  differs  from  private  prices. 
In  the  case  of  the  private  business  the  monopoly  seeks  only 
the  greatest  possible  profits;  in  the  case  of  the  public  monopoly 
the  government  seeks  the  greatest  possible  public  utility. 
Even  when  the  government  makes  a  high  charge,  it  does  not 
aim  simply  at  the  maximum  monopoly  profits;  for  the  public 
element  always  modifies  the  charges  in  some  particular.  If 
it  did  not  so  modify  the  charges,  or  at  all  events  give  better 
facilities  for  the  same  charge,  there  would  be  no  reason  for 
the  assumption  of  the  business  by  the  public. 

The  charge  to  the  individual  is  thus  a  price;  but,  instead 
of  being  quasi-privsite,  it  is  now  a  pubhc  price. ^  The  relation 
of  the  government  to  the  individual  is  not  the  same  as  in  the 
preceding  case.  The  special  benefit  to  the  individual,  although 
it  is  still  preponderant,  is  relatively  less;  the  public  purpose  has 
become  of  more  importance. 

We  come  now  to  the  really  important  point :  The  feelings  of  the 
citizens  may  undergo  a  further  change,  and  the  government  may 
conclude  to  manage  the  enterprise  in  a  different  way.  The  ele- 
ment of  private  interest  or  special  benefit  may  diminish,  and  the 
feeling  of  public  interest  may  increase  so  as  to  become  the 
controlling  consideration.  The  government,  because  of  these 
changed  conditions,  will  now  decide  no  longer  to  run  the  busi- 
ness on  the  principle  of  profits.  It  will  reduce  the  charges  some- 
what, so  as  perhaps  only  to  cover  the  cost  of  operation,  or  not 
even  tp  cover  this  cost.  While  it  will  still  roughly  endeavor 
to  charge  each  individual  according  to  the  benefit  he  derives, 
it  will  still  further  modify  these  charges  in  the  direction  of  the 
public  interest,  charging  less  to  those  who  can  afford  it  less.  In 
other  words,  special  benefit  to  the  individual  is  still  measurable 
and  charged  for;  but  since  the  common  interest  of  the  commu- 
nity is  now  of  more  importance,  the  charge  for  special  benefit 
may  be  slightly  modified  by  other  considerations,  as  in  the  case  of 
the  postal  service,  where  newspapers  are  put  into  a  lower  class 

*  Professor  Plehn  prefers  the  term  "rates"  to  "prices"  on  the  ground 
that  we  ordinarily  speak  of  water  rates,  telegraph  rates  and  the  like.  In- 
troduction to  Public  Finance,  3d  ed.,  1909,  pp.  88-89.  To  this,  however,  there 
is  a  double  objection — first  because  the  usage  is  by  no  means  universal — wit- 
ness water  "rents,"  telephone  "tolls,"  railway  "fares,"  etc.,  and  second,  be- 
cause in  countries  like  England  they  would  at  once  be  confused  with  the 
local  "rates"  or  taxes. — The  United  States  Census  Bureau's  Classifica- 
tion of  Public  Revenues  as  published  in  the  volume  on  Wealth,  Debt  and 
Taxation  (Twelfth  Census,  1907)  accepts  the  category  of  public  prices. 


426 


ESSAYS  IN  TAXATION 


M 


Mil 


than  letters.    The  charge  to  the  individual  has  now  become  a 

i^  Finally,  another  change  may  occur.  The  citizens  may  become 
convinced  that  the  public  purpose  has  become  the  exclusive 
consideration,  and  that  the  special  interest  of  the  individual  is 
swallowed  up  in  the  general  interest.  The  government  will  now 
entirely  abandon  the  principle  of  charging  according  to  special 
benefit  for  one  of  two  other  methods:  it  will  either  make  no 
charge  at  all  to  the  individual  for  the  special  service;  or,  if  it 
still  makes  a  slight  charge,  it  will  levy  this  not  according  to  the 
principle  of  special  benefits,  but  primarily  according  to  the 
principle  of  faculty  or  ability  to  pay.  The  expenditure  must 
indeed  be  defrayed,  but  it  will  now  be  met  by  a  general  charge 
on  the  whole  community,  or  by  a  charge  upon  that  section  of 
the  community  which  avails  itself  of  the  service;  but  even  in 
the  latter  case  it  will  not  measure  the  special  charge  to  the  indi- 
vidual by  the  benefits  he  may  personally  receive.  In  other 
words,  the  payment  is  now  a  tax—in  some  cases  general,  in 
others  special.  ""^ 

Let  us  illustrate  this  process:  While  a  railway  is  in  private 
hands,  the  individual  traveller  or  shipper  pays  a  private  price. 
If  the  government  buys  up  the  railways  and  manages  them  in 
precisely  the  same  way,  the  payment  made  by  the  individual  is 
still  a  price — a  Q^ast-private  price,  because  demanded  by  the 
government  acting  as  if  it  were  a  private  party.  But  the  govern- 
ment, although  it  still  seeks  to  make  a  profit,  is  likely  soon  to 
introduce  some  changes  in  the  public  interest.  Because  of  the 
resulting  changed  relations  between  the  enterprise  and  the  pa- 
tron, the  payment  becomes  a  public  price.  After  a  short  time 
the  government  may  reduce  its  charges  considerably,  barely 
covering  the  cost,  and  may  modify  them  still  further  in  regard 
to  individuals  or  to  sections  of  the  country  by  considerations  of 
public  policy.  The  payment  is  then  practically  a  fee  or  toll. 
Finally,  the  demand  may  be  made  in  the  public  interest,  as  in 
Australia  to-day,  for  free  railway  travel.  The  payment  then 
made  by  the  community  to  defray  the  gratuitous  railway  serv- 
ice would  be  a  tax.  In  the  case  of  the  common  highways  and 
the  canals,  this  same  evolution  is  discernible;  and  the  final  stage 
of  free  travel  has  actually  been  reached. 

As  another  illustration  take  the  water-supply.  At  first  often 
in  the  hands  of  a  private  company,  it  may  then  be  managed  by 
the  city,  but  according  to  the  same  principles.    Every  one  pays 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     427 

in  proportion  to  his  consumption,  but  pays  more  than  it  costs 
the  city  to  supply  the  water;  the  enterprise  is  managed  on  the 
principle  of  profits.  Then  comes  a  change.  The  city,  still  charg- 
ing according  to  consumption,  Hmits  its  charges  to  cost.  Then 
often  comes  another  change;  and  the  city,  while  still  trying  to 
make  both  ends  meet,  often  charges  each  individual  a  lump  sum, 
but  makes  the  richer  consumer  pay  more  than  the  poorer,  even 
though  he  consumes  no  more.  Finally,  we  reach  the  stage 
already  attained  in  some  European  cities,  and  also  demanded 
for  Detroit  by  Mayor  Pingree,  where  the  water  is  supplied  to 
the  citizens  without  charge,  and  where  the  expense  of  water- 
supply  is  put  in  the  same  category  as  the  expense  of  street  clean- 
ing. The  charge  for  water-supply  has  thus  run  through  the 
various  stages — private  price,  quad-pnYSite  price,  pubUc  price, 
fee,  and  tax.  Some  cities,  indeed,  may  have  jumped  over  the 
intermediate  stages,  may  have  started  with  the  final  stage,  or 
may  never  have  reached  this  stage.  In  fact,  although  this  is 
unusual,  the  principle  of  development  may  even  be  reversed, 
the  public  interest  may  lag,  and  the  methods  of  private  manage- 
ment may  again  be  introduced.  The  principle  itself  is,  however, 
everywhere  discernible,  whether  it  works  forward,  as  it  usually 
does,  or  backward,  as  in  some  exceptional  cases. 

Again,  at  the  present  time  the  charge  for  a  postal  stamp,  like 
a  canal  or  road  toll,  is  almost  everywhere  a  fee;  ^ yet  the  charge 
might  be  so  high  that  the  special  benefit  would  become  a  special 
burden,  and  the  payments  would  become  taxes  on  communica- 
tion or  on  transportation.  This  was  very  common  in  former 
times.  Highways  were  at  first  in  private  hands,  and  the  charge 
was  an  extortion  levied  by  the  feudal  lord.  Later  the  charge 
became  a  monopoly  tax  on- transportation;  then  it  became  a  toll; 
until  to-day  the  charges  have  generally  disappeared,  and  the 
highways  are  managed  on  the  principle  of  gratuitous  service, 
and  are  supported  out  of  the  proceeds  of  a  general  tax. 

What  has  been  said  of  the  railway  and  of  the  water-supply, 
of  the  postal  and  of  the  highway  systems,  may  be  repeated  of 
all  other  governmental  enterprises — the  canal,  the  telegraph,  the 

*  As  early  as  1765  Benjamin  Franklin  perceived,  in  part  at  least,  the  differ- 
ence between  a  fee  and  a  tax.  In  reply  to  the  question  of  the  parliamen- 
tary committee,  "Is  not  the  post-office  a  tax  as  well  as  a  regulation?  "  he 
replied,  "No:  the  money  paid  for  the  postage  of  a  letter  is  not  of  the  nature 
of  a  tax:  it  is  merely  a  quantum  meruit  for  a  service  done."  Do  well,  His- 
tory of  Taxation  and  Taxes  in  England,  ii.,  p.  46.  Franklin,  however,  failed 
to  see  that  it  might  become  a  tax. 


ttl"i"! 


I 


428 


ESSAYS  IN   TAXATION 


telephone,  the  gas  and  the  electric  light,  the  horse  railway 
and  the  trolley  line,  the  docks,  the  markets  and  the  ferries 
Moreover,  if  the  socialistic  scheme  is  ever  introduced,  the  same 
prmciple  will  apply  to  all  the  cases  of  governmental  manage- 
ment of  what  once  were  private  enterprise.  Whether  the  govern- 
ment ought  to  assume  these  enterprises  is,  of  course,  a  question 
quite  apart  from  this  discussion  of  the  economic  and  fiscal  nature 
of  the  payments  made  by  the  citizens. 

The  demands  made  by  government  for  supplying  the  individ- 
ual with  commodities  or  services  diffedncharacter,  then,  accord- 
ing to  the  economic  relations  between  the  government  and  the 
mdividual.  Just  as  a  fee  may  become  a  tax,  so  it  may  become  a 
price  and  nee  versa.  While  a  price  can  never  be  a  tax,  the  pay- 
ment for  the  same  service  may  take  the  form  of  a  price  in  one 
state,  a  fee  m  a  second,  and  a  tax  in  a  third.  The  real  test  is  the 
economic  relation  between  the  individual  and  the  government 
and  the  relative  strength  of  the  individual  private  interest  a^ 
compared  with  the  common  or  public  interest. 

While  there  is  thus  a  clear  distinction,  chiefly  of  degree   be- 
tween a  price  and  a  fee,  and  between  a  fee  and  a  tax,  we'find 
m  actual  life  some  payments  which  combine  separate  elements 
and  which  it  is  difficult  for  anyone  but  a  trained  observer  to 
classify.    Take,  for  instance,  the  combination  of  price  and  of 
tax.    If  the  hquor  business  is  in  private  hands  and  the  govern- 
ment imposes  a  tax  on  each  glass  sold,  the  individual  pays  a 
certain  amount  which  includes  both  price  and  tax.    If  the  price 
of  a  glass  of  liquor  was  five  cents  and  the  government  levies  a 
tax  of  one  cent,  the  individual  pays  six  oents,  of  which  five  is 
the  pnce  and  one  is  the  tax.    When  the  government  has  a  mol 
nopoly  of  the  liquor  manufacture  or  trade,  as  in  some  countries, 
the  relation  is  exactly  the  same,  and  the  charge  may  be  even 
more  than  six  cents.    In  fact,  that  is  generally  the  reason  why 
the  monopoly  is  introduced;  but  it  is  only  the  surplus  over  five 
cents  that  is  the  real  tax.    The  same  reasoning  applies  to  other 
fiscal  monopohes,  like  the  tobacco  or  the  sugar  or  the  salt  monop- 
oly ;  the  amount  which  the  individual  pays  over  and  above  what 
he  would  have  to  pay  to  a  private  vendor  is  the  indirect  tax. 
I  his  might  be  true  also  of  the  charges  for  railway  or  for  water- 
supply;  but  at  present  rarely  applies,  because  they  are  not  fiscal 
monopohes.     They  may  be  monopolized  by  the  government- 
but  m  almost  every  case  the  object  is  not  to  raise  the  price,  but 
to  diminish  the  price-not  to  make  profits,  but  to  secure  general 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     429 

social  utility.  Yet  just  as  the  French  and  Italian  governments 
impose  taxes  on  the  private  railway  tickets,  the  amount  of  which 
is  separately  printed,  thus  enabling  the  purchaser  to  distinguish 
between  the  price  and  the  tax,  the  distinction  might  be  made  if 
the  railways  were  owned  and  managed  by  the  government. 
The  payments  would  be  economically  separable. 

In  the  same  way,  as  has  already  been  abundantly  illustrated, 
a  given  payment  may  include  a  fee  and  a  tax.  Governments, 
however,  do  not  usually  make  this  sharp  distinction.  For  in- 
stance, some  American  states  speak  of  insurance  fees;  other  states 
call  the  identical  payments  insurance  taxes.  In  some  of  the 
Southern  states  agricultural  fees  are  sometimes  called  fertilizer 
taxes;  and  on  the  continent  the  terms  ''fees"  and  "taxes"  are 
often  indiscriminately  applied.  Practically,  this  may  not  always 
be  of  great  importance;  but  in  theory  the  distinction  is  clear, 
and  it  is  beginning  to  be  recognized  by  the  courts. 

A  more  difficult  and  more  confusing  case  arises  when  one 
payment  is  levied  in  the  form  of  another,  as  when  a  pubHc  price 
is  levied  in  the  shape  of  a  tax.  Take  for  instance  the  water  or 
the  gas  supply.  In  Europe,  when  the  towns  bought  out  the 
private  water  or  gas  companies,  they  at  first  continued,  as  some 
do  yet,  to  charge  according  to  individual  consumption.  In  some 
cases,  however,  for  purposes  of  convenience,  they  assumed  that 
each  household  would  use  a  certain  quantity;  and  as  some  of 
the  local  taxes  were  levied  on  the  occupier,  they  simply  added  a 
certain  amount  to  the  tax,  as  in  some  English  towns  where  a  spe- 
cial water  rate  is  levied  like  the  other  local  rates,  or  as  in  Austria 
where  an  addition  is  made  to  the  local  tax  on  house  rent.  The 
payment  is  nevertheless  a  price,  and  not  a  tax;  for  if  more  than 
the  assumed  normal  quantity  is  used  by  anyone,  especially  by  a 
business  man  or  by  a  factory-owner,  the  charges  are  increased 
according  to  the  consumption.  If  the  charges  were  reduced,  or 
if  all  idea  of  special  benefit  were  abandoned  and  the  charge  were 
assessed  on  the  whole  community  or  on  a  part  of  community 
irrespective  of  the  relative  quantities  consumed,  then  the  pay- 
ment might  become  a  fee  or  even  a  tax,  whether  general  or 
special.  As  a  matter  of  fact,  however,  in  most  places  to-day  the 
payment  is  still  a  price,  even  though  sometimes  levied  in  the 
shape  of  a  tax.  Thus,  the  English  have  a  separate  class  of  munic- 
ipal revenues  called  income  from  "gas  and  water  undertakings," 
which  shows  that  the  distinction  is  dimly  recognized.  In  New 
York  the  charge  for  Croton  water  is  technically  called  the  "  water 


IflU 


•ff' 


430 


ESSAYS  IN  TAXATION 


tiaJ.„rr-^*'.f '"'"«*'  '"°^*  ^°P^'  «=»"  it  the  water 
tax  and  confound  it  with  a  genuine  tax.    Here,  it  is  true  this 

rate"  ,8  paid  separately;  but  in  some  of  the  Eurolan  citie^ 

tax     Nevertheless  so  long  as  the  economic  relation  of  individual 
to  the  government  is  different,  the  charges,  even  though  con 
fused  under  the  same  appellation,  are  really  distinct! 

VI.  Conclusions 

actual  Tnd'?t^„S\r''Kr^  discussion,  we  find  that  under 
actual  conditions  all  public  revenues  are  either  eratuit^ns 

c^tStl^arr'T  -'^.^*"««-;  that'the'  com^S 
contr  butions  are  levied  in  virtue  of  the  power  of  eminent 

domam,  of  the  penal  power  (either  as  a  separate  ^le™ 
the  fiscally  important  part  of  the  police  power),  or  of  the  taring 

three  forms  of  fees,  special  assessments  and  taxes, 
tha^w  ^'n  !"  ^^f  '^ha'lges  known  as  prices,  there  is  no  doubt 
that  we  must  put  quasi-private  prices  under  the  head  of  con 
tractua  payments;  but  public  prices-the  charges  made  for  b 
dustrial  enterprises  under  certain  conditions-occupy  a  mTdZ 
position,  and  might  be  called  semi-compulsoiy.    If  thf^ 
ernment  manages  an  enterprise  just  Hke  an  individual    the" 
r«r  ".K^^'^r  '^  '^  contractual  payment;  if  the  government 
makes  the  whole  community  or  part  of  th;  community  paT"t 
IS  a  compulsory  payment;  but  if  the  government  employs  the 
intermediate  pnnciple  of  charge,  the  payment  is  neHher  whollv 
contractual  nor  whollv  onmr^u\<^r^r^r   k,;+        x  •  ^' ,  ^'^  wnouy 
P«ph     TK^  .il    -fi    ?.  ^  compulsory,  but  contains  elements  of 
each.    The  classification  would  then  be  as  follows:— 

Gratuitous p.^. 

Contractual .     Public  Property  and  Industry  Prices 

'Eminent  Domain    .     .     .  .Expropriation. 

Penal  Power.    ....  .  Fines  and  Penalties. 

rr>    •  Fees. 

.Taxing  Power     ....       Special  Assessments. 

'  (Taxes. 

But  if  the  real  distinction  is,  as  we  have  suggested  the 
econonaLc .  relation  of  the  individual  to  the  government  the 
classification  of  charges  would  depend  upon'thoTmpoiaJce 
of  the  mdividual  mterest  measured  by  the  special  bS  to 


C 

>  ^ 


Compulsory 


\m 


THE  CLASSIFICATION  OF  PUBLIC  REVENUES     431 

the  individual,  as  compared  with  the  common  interest  or  public 
purpose  measured  by  the  ability  of  the  individual  to  contribute 
to  public  charges.  In  the  one  case  the  individual  is  the  chief 
or  only  factor;  in  the  other  case  the  individual  sinks  his  own 
importance  in  the  common  welfare  of  the  community,  and  what- 
ever benefits  he  derives  come  to  him  only  incidentally  as  a 
result  of  his  membership  in  the  community.  At  one  extreme 
lie  prices,  winch  depend  upon  the  relation  of  the  government 
to  some  particular  industry  or  individual;  at  the  other  extreme 
lie  taxes,  which  depend  upon  the  relation  of  the  government 
to  all  industries  or  individuals ;  midway  between  these  extremes 
lie  fees.  From  this  point  of  view,  if  we  omit,  as  of  no  importance, 
expropriations  and  fines,  there  are  only  three  great  classes:  viz., 
prices,  fees  and  taxes.  The  essential  characteristic  of  a  fee  is 
the  existence  of  a  measurable  special  benefit,  together  with 
a  predominant  public  purpose:  the  absence  of  public  purpose 
makes  the  payment  a  price;  the  absence  of  special  benefit 
makes  it  a  tax. 

As  these  elements  are,  however,  present  in  varying  degree 
in  different  payments,  the  charges  shade  off  into  each  other 
almost  imperceptibly,  forming  intermediate  classes  which  are 
of  great  practical  importance.  Thus  the  public  price  has  certain 
elements  of  the  price  and  certain  elements  of  the  fee;  but  it  is 
of  sufficient  importance  to  warrant  its  separation  in  a  distinct 
category.  Again,  as  we  have  seen,  a  special  assessment  has 
many  points  in  common  with  the  fee,  but  has  a  decided  signif- 
icance of  its  own.  Our  final  classification  would  then  be  as 
follows: — 


1.  Special  benefit  the  ex- 

clusive consideration. 

2.  Less  special  benefit,  al- 

though still   prepon- 
derant. 

3.  Si^ecial  benefit  meas- 

urable. 

4.  Special    benefits   still 

assumed. 

5.  Special   benefits  only 

an  incidental  result. 


Public  purpose  inci-    Quasi-private  Price. 

dental. 
Public    purpose    of    Public  Price. 

some  importance. 

Public     purpose     of    Fee. 
still    greater    im- 
portance. 

Public    purpose   the    Special     Assess- 
controUing  consid-        ment. 
eration. 

Public   purpose  the    Tax. 
exclusive  consider- 
ation, principle  of 
faculty  or  ability. 


■HI 


mw 


1^ 


432 


ESSAYS  IN  TAXATION 


tW— "^^^  classification  would  result  in  the  following  defini- 

indlviST"'"""  ^''*  *'  ^  voluntary  payment  made  by  an 
individual  for  a  service  or  commodity  sold  by  the  government 
m  the  same  way  as  a  private  individual  would  sell  ^°'^*'"^*'°* 
A  public  pnce  is  a  payment  made  by  an  individual  for  a  service 
beneZ^MhJrH^  '/  the  govermnent  primarily  for  the  spec  al 
commLiy      "''^^•*^"^''  ''"*  secondarily  in  the  interest  of  the 

A  fee  is  a  payment  to  defray  the  cost  of  each  recurring  service 

but  Se^rin/  ''*'  """'^T''"'  P"""^"'^  '"  '"^^  publicTterert 
but  confernng  a  measurable  special  advantage  on  the  fee-payer 

A  special  assessment  is  a  payment  made  onte  and  for  all  to 

defray  the  cost  of  a  specific  improvement  to  property  undertaken 

Ln  Wh    "  Z'"'','"'  r^  ^'^'"''^  ^y  '^'  gover^ent  in  propor- 
tion to  the  particular  benefit  accruing  to  the  property  oLer 

^  <ax  IS  a  compulsory  contribution  from  the  person  to  the 

rerrr^lf"  'r  "^l  ^'.^  ^'"'^''^  ■■"^"--^  in  VcoLon 
interest  of  all,  without  reference  to  special  benefits  conferred 

if  ^TJ'^^^^u    "^^  "'aerification  set  forth  in  the  above  pages  has  no« 

defJed  wZ'i^heTf'r'  ^ "'"."'^l^  ""  ™P"'*«"'  write^    Th"  mosi 
rv   w  Z  .  *?*,  *""  "^^""^^  ^^  f^n  done  by  Italian  writers 

Ladm^fica^ne  delle  publiche  entrate  dei  preizi,  Rome.TaZO^  ThTlatte; 
wnter  oompares  at  some  length  my  suggestions  Uth  th^se  rf  Einaudwl^o 


CHAPTER  XV 


THE   BETTERMENT  TAX 


lii 


It  has  often  happened  that  the  technical  name  of  a  new  custom 
has  been  borrowed  from  abroad;  but  it  is  rare  to  find  a  foreign 
institution  described  by  an  exceedingly  uncommon  term,  which 
is  then  naturaUzed  on  the  assumption  that  foreign  usage  is 
being  followed.  This,  however,  is  the  case  with  the  ''Better- 
ment Tax"  in  England.  The  institution  is  indeed  found  in 
America,  but  the  name  is  unusual  there.  Exactly  when  and  how 
the  term  came  to  be  introduced  into  England  is  uncertain;  ^  but 
nine  out  of  ten  Englishmen,  when  using  the  expression,  think 
that  they  are  following  the  American  custom.  The  term  has 
now  become  so  current  in  England  that  it  may  be  considered 
as  firmly  estabUshed. 

I.  The  Origin 

The  principle  of  betterment  has  recently  been  defined  by 
an  ofl&cial  commission  as  ''the  principle  that  persons  whose 
property  has  clearly  been  increased  in  market  value  by  an  im- 
provement effected  by  local  authorities,  should  specially  contrib- 
ute to  the  cost  of  the  improvement." "  Another  official  report 
deals  specifically  with  "  assessments  according  to  benefits  (better- 
ment or  amelioration),"  and  defines  the  custom  as  "assessment 
according  to  benefits,  and  the  interception  by  charge  upon  prop- 
erty of  a  portion  of  the  value  added  to  such  property  by  the 
expenditure  of  public  money  for  improvement."  ^  To  all  Ameri- 
cans it  will  be  apparent  at  once  that  what  we  are  dealing  with  is 
nothing  but  the  system  of  special  assessments. 

*  The  Duke  of  Argyll,  in  a  speech  in  the  House  of  Lords,  referred  to  it  as 
an  "absurd,  foreign  and  vulgar"  word.  Mr.  Baumann,  on  the  other  hand, 
says:  "The  word  is  respectable,"  but  "the  thing  Ls  not,"  Almost  the  only 
state  in  America  where  the  term  "betterment  tax"  is  to  be  found  is  Massa- 
chusetts: and  even  this  is  true  mainly  of  the  earlier  laws  and  cases. 

2  Report  from  the  Select  Committee  of  the  House  of  Lords  on  Town  Im- 
provements (Betterment),  1894. 

'  Orange  Book  of  the  London  County  Council,  entitled  Precedents  of  Assess- 
ment according  to  Benefits,  1893. 

433 


434 


ESSAYS  IN  TAXATION 


What  appears  almost  self-evident  to  Americans  is  hotly  dis- 
puted m  England.  In  the  United  States  the  local  taxes  so  far 
as  real  estate  is  concerned,  are  imposed  on  the  owner  oHhe  laid 

occuofer  Tnl'°r'r^'^'«  ''^  ^'^'^^  '''  '^^''^'  ^'^  '-i^d  oSe 
T^^l  A^-  "^  ^"'^'"^  ^^^^  ^^^  t«^  i«  'assessed  on  all  lands- 
n  .r  n  f ",'  r'"'*^  r'^""^  productive  or  rent-yielding  land' 
In  the  Umted  States,  therefore,  it  was  comparatively  eLy  to 
add  to  the  existing  tax  on  the  proprietor  this  newer  fyst^m  S 
charges;  m  England  the  process  is  more  difficult,  bTcau"  it 

change  m  the  method  of  assessment.    Not  the  occupier  but  the 
owner  of  the  land,  is  to  be  directly  reached.    Thus  the  proposal 
which  m  America  is  regarded  asin  harmony  with  vested  fnterest  ' 
IS  viewed  by  its  opponents  in  England  as  an  attack  on  the  rights 
of  private  property.  tucngutb 

.Jntl  r'^T  ^'  '*  ™f7  ^^°''  *^^  ^^^^  «^  assessments  for 
special  benefits  is  an  old  Enpjlish  custom.     In  1662  '  an  act 

was  passed  to  authorize  the  widening  of  certain  streets'  in  West- 
minster and  providing  for  the  defrayal  of  the  cost  by  volun- 
tary  subscriptions.  In  case  this  should  not  suffice,  the  commis- 
sioners  to  lay  out  the  streets  were  empowered  to  charge  the 
owners  of  the  property  in  proportion  to  the  benefits  received.^ 
The  important  clause  reads: 

iftfiJV^  T^^^  r  °''*^  *^^*  ^'^^  *^^^  ^'^  betterment,  prior  to  the  law  of 
1662  have  been  discovered.    The  first  is  the  Romney  Mai^h  case  in  12'^n 
Thjs  referred  to  the  repair  of  sea-walls.    The  ordinanc^vided  thaf the 

.l^^f  t    f^     ""'"^T'  ^y  ""''''  ^"  '^'  ^'-^"^^  ^"^  tenements  whLh  are 
subject  to  danger  withm  said  marsh"  and  then  "havine  resnJt  Tn  fhl 

shall  ordam  how  much  appertaineth  to  eveiy  one  to  uphold  and  repai; 
the  same  waUs.    Cf.  Cannan  History  of  Local  Rates  in  Englaml,  1912  nil 

The  second  ca^e  IS  that  of  miproving  the  rivers  Lea  and  Thaines  in  1605 
The  law  provides  ''for  clearmg  the  passage  by  water  from  London  to 
Oxford"  and  says:  "For  that  it  is  reasonable,  just  and  eaual  ihn?fLl "  I ' 
partaJ^e  in  the  benefit  of  any  good  work  sho  Jd  i^Tptt^^^^^^ 
Uy  the  costs  and  charges  thereof:  ...  the  commissioned  Zll  havP 

power  ...  to  tax  and  a^ess  .  .  .  such  of  the  inhabitants  V.     a    shall 
in  their  opinion  be  hkely  to  receive  ease  or  benefit  by  the  said  pa^^e  " 

J^T^^'f^^f  '"^  ^^  precedents  for  betten^ent  chargL7^Lra 
pp.  439-441 .    For  the  earlier  Dutch  precedent  see  infra,  p.  43?  SomewhS 
analogous  was  the  medieval  pavage  as  found  in  Paris   .   Tin  thT^nr 
teenth  century  and  later.    Cf.  M.  G.  Grandjean,  ObigattlJ^JtaJeT^: 
^mge  et   troitairs    Aru^   usages,  le^lation,   doctriT^^^jL^^ 
acluelles.     Pans,  1919,  esp.  pp.  13  et  seq.  Jt'^prmence 

2 13  and  14  Chas.  II.,  chap.  2,  sec.  29. 


THE  BETTERMENT  TAX 


435 


"And  whereas,  the  houses  that  remain  standing  .  .  .  will  receive 
much  advantage  in  the  value  of  their  rents  by  the  liberty  of  ayr  and 
free  recourse  for  trade  and  other  conveniences  by  such  enlargement, 
it  is  enacted  .  .  .  that  ...  a  jury  .  .  .  shall  .  .  .  judge  and  assess 
upon  the  owners  and  occupiers  of  such  houses,  such  competent  sum  or 
sums  of  money  or  annual  rent,  in  consideration  of  such  improvement 
and  renovation  as  in  reason  and  good  conscience  they  shall  judge  and 
think  fit." 

Five  years  later  a  similar  act  was  passed,  to  provide  for  the 
rebuilding  of  the  city  of  London  after  the  great  fire.  This  con- 
tained an  almost  verbal  repetition  of  the  clause  just  cited.  The 
changes  were:  first,  that  the  charge  was  then  to  be  made  "in 
consideration  of  such  improvement  and  melioration,"  instead 
of  "improvement  and  renovation";  and,  secondly,  that,  whereas 
the  charge  of  1662  was  to  be  assessed  on  the  "  owners  and  occu- 
piers," the  new  charge  was  to  be  levied  on  the  "owners  and 
others  interested,  of  and  in  such  houses,"  according  to  "their 
several  interests."  ^  That  this  law  was  not  a  mere  dead  letter  is 
shown  by  a  passage  in  Pepys'  Diary  where  the  actual  operation 
of  "the  benefit  of  the  melioration"  is  interestingly  described.^ 

Thus,  over  two  hundred  years  ago  the  principle  over  which 
so  earnest  a  contest  is  now  being  waged  was  in  full  operation 
and  in  the  very  city  where  it  is  vehemently  assailed  as  an  unjust 
system  of  foreign  importation. 

The  law  of  1667  is  interesting  in  another  respect.  Not  only 
were  new  streets  to  be  laid  out,  but  the  commissioners  were  em- 
powered to  design  and  set  out  "  the  numbers  and  places  for  all 
common  sewers,  drains  and  vaults,  and  the  order  and  manner 
of  paving  and  pitching  the  streets  and  lanes  within  the  said  city 
or  liberties  thereof."    Then  follows  the  significant  section:^ — 


(( 


For  the  better  effecting  thereof,  it  shall  ...  be  lawful  ...  to 
impose  any  reasonable  tax  upon  all  houses  within  the  said  city  or 
liberties  thereof,  in  proportion  to  the  benefit  they  shall  receive  thereby, 
for  and  towards  the  new  making,  cutting,  altering,  enlarging,  amend- 
ing, cleansing,  and  scouring  all  and  singular  the  said  vaults,  drains, 
sewers,  pavements  and  pitching  aforesaid." 

Here  not  only  is  the  word  "benefit"  used,  but  the  charge  is 
called  a  tax.    Still  more  important  is  the  fact  that  while  the 

*  18  and  19  Chas.  II.,  chap.  18,  sec.  24. 

2  Pepijs*  Diary,  under  date  Dec.  3,  1667.    The  passage  is  quoted  in  the 
London  County  Council's  Orange  Book  of  Precedents,  p.  37. 

*  19  Chas.  II.,  chap.  3,  sec.  20. 


II 


436 


ESSAYS  IN  TAXATION 


custom  Itself  seems  to  have  died  out  in  England,  this  act  was 
the  model  upon  which  was  framed  the  first  law  providmg  for 
special  assessments  in  America.  The  province  law  of  1691  of 
New  York  '  followed  the  act  of  1667  almost  word  for  word-  and 
from  New  York,  the  custom  later  spread  all  over  the  United 
btates.  The  system  of  special  assessments  or  "betterment" 
although  It  fell  into  disuse  in  the  country  of  its  origin  ^  is  thus 
prmianly  an  English  institution. 


I 


II.  Bettermmt  and  Taxation 

We  now  come  to  the  question  which  really  Hes  at  the  root  of 
the  whole  controversy  in  England:  Is  the  so-called  ''betterment 
tax  a  true  tax  or  "local  rate"?  What  appears  to  be  merely  a 
question  of  terminology  has  led  to  a  great  deal  of  confusion.  For 
if  It  is  a  tax  or  rate,^  why  should  it  be  levied  differently  from 
other  rates?  And  if  it  is  not  a  tax  or  rate,  under  what  authority 
can  it  be  levied  at  all? 

We  must  revert  to  what  has  ah-eady  been  said  in  a  previous 
chapter,  but  it  is  necessary  to  discuss  the  subject  somewhat 
more  in  detail. 

As  we  have  already  seen,  when  the  state  makes  the  individual 
give  up  a  part  of  his  property,  it  does  s6  primarily  through  the 
power  of  taxation,  which  in  this  wider  sense  denotes  a  forced 
contribution.    Governments  may  levy,  and  have  always  levied, 

» It  is  worthy  of  note,  however,  that  we  find  two  instances  already  in 
New  Amsterdam  in  1657  and  1660.  The  petition  for  paving  the  Heere 
Graft  with  stone  asked  "that  each  one  benefitted  shall  be  made  to  pay  a 
proportion  of  the  expense."  See  Paulding,  Affairs  and  Men  of  New  Am- 
s'erdam  m  the  Time  of  Governor  Stuyvesant,  1843,  pp.  14  and  16  Special 
assessments  seem  to  have  been  fairly  common  in  the  towns  of  the  Low 
Country.  In  Utrecht  we  find  them  in  1659  and  1661  under  the  name  of 
Meliorations  (i.  e.,  betterments).  They  can  be  traced  back  as  far  as  the 
middle  of  the  sixteenth  century.  In  1558  e.  g.,  they  were  employed  by  the 
towii  of  Alkmaar  to  improve  the  market  place.  Eberstadt,  Stadtehau  und 
Wohnungswesen  in  Holland,  1912-14,  vol.  ii.,  76  et  acq. 

2  In  England  we  find  during  the  eighteenth  century  several  paving  acts 
applicable  to  London  which  levy  the  entire  cost,  or  two-thirds  of  the  cost 
of  the  paving  on  the  abutting  property  owners.    Cf.  Cannan,  ov   cit ' 
pp.  128-129.  >     y-        y 

/Cannan  History  of  Local  Rates  in  England,  p.  5,  attempts  to  draw  a 
distinction  beti^een  rates  and  taxes  when  in  reaUty  he  is  merely  distin- 
guishmg  between  apportioned  and  percentage  taxes.  He  is  forced  to  the 
rather  absurd  conclusion  that  the  national  land  tax  in  England  is  a  rate! 


THE  BETTERMENT  TAX 


437 


these  forced  contributions  according  to  different  principles 

either  that  of  benefit,  or  that  of  ability.  They  may  say  to  the 
individual:  We  are  performing  a  special  service  for  you,  and 
shall  make  you  pay  for  this  peculiar  benefit  which  you  derive; 
or  they  may  say:  we  are  expending  certain  moneys  in  the  public 
interest,  and  shall  ask  you  to  pay  your  share,  according  to  your 
means.  The  latter  payment  is  called  a  tax  in  the  narrower 
sense  of  the  word.  The  question  at  once  presents  itself:  Is  not 
the  former  payment  also  a  tax? 

The  diflSculty  here  arises  from  confounding  special  with  gen- 
eral benefits.    The  theory  of  benefits  or  of  protection  is  true  in 
the  sense  that  if  the  government  taxes  the  people,  it  is  in  duty 
bound  to  protect  them  and  to  confer  upon  them  the  advantages 
of  good  government.    That  is  what  is  meant  in  America  by  the 
doctrine  of  *' public  purpose."    Taxes  must  be  used  for  public 
purposes,  and  must  confer  upon  the  public  the  usual  benefits  of 
government.    But  this  is  not  the  theory  of  benefit  as  the  term  is 
commonly  employed.     The  theory  of  benefit  claims  that  the 
government  must  give  to  each  individual  a  return  equivalent 
to  the  tax  he  has  paid.    If  this  means  anything  at  all,  it  means 
that  benefit  and  taxation  are  correlative.     In  this  sense,  the 
claim  is  unfounded;  for  the  government,  when  it  levies  a  tax, 
never  guarantees  to  do  a  particular  thing  for  the  particular  indi- 
vidual, or  to  confer  upon  him  a  special  benefit.    No  one  would  be 
justified,  legally  or  morally,  in  claiming  a  restitution  of  a  tax 
because  the  action  of  the  government  was  not  worth  quite  so 
much  to  him  as  he  thinks  it  is  worth  to  his  neighbor.    The  bene- 
fits of  state  action,  for  which  a  tax  is  paid,  are  quantitatively 
unmeasurable;  or,  so  far  as  they  may  be  measured,  they  accrue 
to  the  individual  not  as  a  special  result,  but  as  an  incidental 
result,  of  his  participation  in  the  common  weal.    The  benefits  of 
the  army,  of  the  judicial  system,  of  the  consular  and  diplomatic 
service,  and  of  all  the  other  objects  for  which  expenditures 
are  made  and  taxes  in  general  are  levied,  do  not  accrue  to  any 
one  taxpayer  more  than  to  another.    Even  in  local  finance,  where 
a  general  tax  is  levied  to  defray  all  the  local  expenditures,  it 
cannot  be  maintained  that  the  benefits  arising  from  the  action 
of  the  local  judiciary,  of  the  police,  of  the  fire  service,  of  the 
board  of  health,  or  of  the  other  departments  of  local  government 
are  separately  measurable  for  each  individual.    One  may  value 
the  benefits  greatly,  while  another  may  feel  less  interest  in  that 
particular  branch  of  the  administration;  yet  this  cannot  be  per- 


M 


438 


ESSAYS  IN  TAXATION 


* 


mitted  to  change  the  measure  of  their  obligations  to  the  govern- 
ment. Every  member  of  the  community  for  which  these 
expenditures  are  made  must  contribute  to  these  expenditures 
m  proportion  to  his  means  to  pay.  If  the  government  neglect 
Its  duty  and  fail  m  protecting  his  person  from  violence  or  his 
property  from  fire  or  from  destruction,  he  may  use  his  political 
rights  in  overturning  or  in  improving  the  administration:  but 
he  has  no  shadow  of  a  claim  for  a  diminution  of  his  tax  rate 
Protection  and  taxation,  in  this  sense,  are  not  correlative. 

We  have  thus  far  been  dealing  with  general  taxes,  whether 
federal,  state  or  local.    A  general  tax  is  a  tax  levied  for  general 
public  purposes.    But  it  may  happen  that  government  desires 
to  raise  money  for  some  special  purpose,  and  the  tax  is  then 
called  a  special  tax.    Thus  there  may  be  a  special  tax  levied  upon 
the  whole  community  to  defray  the  cost  of  a  war,  or  there  may  be 
a  special  local  tax  to  defray  the  cost  of  some  particular  depart- 
ment.   So,  too,  in  a  few  of  the  American  states,  like  New  Jersey 
we  find  not  only  a  special  school  tax,  but  special  taxes,  of  the 
same  nature  as  the  English  local  rates,  for  police  or  for  lighting 
or  for  fire  purposes.    Here,  indeed,  a  special  section  of  the  com- 
munity is  singled  out;  and  one  area  is  subject  to  the  poor  rate, 
while  perhaps  another  is  subject  to  the  watching  or  the  lighting 
rate.    The  charge,  however,  is  still  a  tax,  levied  according  to  the 
generally  recognized  criterion  of  ability;  for  although  the  par- 
ticular area  which  is  benefited  is  put  into  a  separate  class,  the 
benefits  to  the  individuals  of  the  class  are  general,  not  special, 
exclusive,   or  individual  benefits.     Although  all  the  persons 
hable  to  this  special  tax  are  subject  to  the  tax  only  because  the 
section,  as  a  whole,  derives  a  benefit,  yet  each  individual  derives 
a  benefit,  if  at  all,  simply  as  a  member  of  the  section;  the  govern- 
ment does  not  do  any  one  particular  thing  for  him,  as  apart 
from  the  other  members  of  the  section.    The  "rate"  is  a 
special  tax  as  opposed  to  a  general  tax,  because  it  defrays  a 
special  expenditure  of  government;  but  as  to  every  one  within 
the  section,  the  tax  is  payable  whether  the  particular  individual 
receives  much  or  little  benefit. 

In  the  poor  rate,  for  instance,  the  original  law  expressly  pro- 
vided for  assessments  according  to  the  ability  of  the  parishioners, 
or,  as  It  was  subsequently  expressed,  ad  statum  et  facultates  of 
the  inhabitants.  The  degree  of  benefit  accruing  to  each  rate- 
payer is  immaterial;  for  the  rate  is  levied  on  all  the  inhabitants 
according  to  the  English  test  of  ability  to  pay,  which  was  origi- 


THE  BETTERMENT  TAX 


439 


nally  general  property,  but  which  has  since  then  been  confined 
to  productive  real  estate. 

On  this  poor  rate  all  the  other  local  taxes,  with  only  one  or 
two  exceptions,  were  built  up.  Of  the  church  rate  nothing  more 
need  be  said,  since  it  has  always  been  imposed  on  the  same  prin- 
ciple as  the  poor  rate.^  The  sewers  rate  was  originally  levied  by 
a  law  of  1427,  which,  as  well  as  its  successor  of  1531,  does  indeed 
speak  of  the  benefits  or  advantages  to  be  derived.  Some  recent 
writers  have  been  misled  by  this  statement  into  the  belief  that 
it  is  a  precedent  for  the  principle  of  betterment.  A  careful 
reading  of  the  original  acts,  however,  proves  that  the  benefit  is 
jurisdictional  only,  i.e.  that  a  certain  district  is  to  be  selected 
where  the  inhabitants  derive  a  benefit  from  this  governmental 
action,  but  that  the  rate  or  tax  is  to  be  assessed  on  each  individual 
according  to  the  quantity  of  his  lands,  irrespective  of  the  degree 
of  benefit  conferred  upon  him.^ 

At  that  period  the  test  of  ability  to  pay  was  the  quantity  of 
land,  but  later  the  test  became  the  rental  value  of  the  land. 
It  has,  moreover,  been  repeatedly  decided  that  the  sewers  rate 
must  be  levied  on  the  principle  of  ability,  so  that  the  official 

1  The  church  rate  is  said  formerly  to  have  been  made  by  common  estima- 
tion. "What  principle  this  common  estimation  was  founded  on  does  not 
appear,  but  it  was  always  undoubtedly  in  reference  ad  statum  et  facilitates^ 
that  the  burden  was  imposed."  Report  of  the  Law  Commissioners  on  Local 
Taxation,  1843,  Svo  edition,  p.  43.    Cf.  ibid.,  p.  22. 

2  The  law  of  1427  enjoins  the  commissioners  "to  enquire  ...  by  whose 
default  such  damages  have  there  happened,  and  who  doth  hold  lands  and 
tenements,  or  hath  any  common  of  pasture  or  fishing  in  those  parts,  or  else 
in  any  wise  have,  or  may  have,  the  defence,  profit  and  safeguard,  as  well  in 
peril  nigh  as  from  the  same  far  off,  by  the  walls,  ditches,  gutters,  sewers, 
bridges,  causeys  and  wears,  and  also  hurt  or  commodity  by  the  same 
trenches,  and  then  to  distrain  all  them  for  the  quantity  of  their  lands  and 
tenements,  either  by  the  number  of  acres  or  by  their  plow  lands,  for  the  rate 
of  the  portion  of  their  tenure,  or  for  the  quantity  of  their  common  of  pasture 
or  fishing,  together  with  the  bailiffs  of  liberties  and  other  places  of  the  county 
and  places  aforesaid."    6  Hen.  VI.,  chap.  4. 

The  law  then  directs  the  commissioners  to  make,  repair,  or  cleanse  or  stop 
up  the  trenches,  etc.,  "so  that  no  tenants  of  lands  or  tenements  .  .  .  nor 
other  of  what  condition,  state  or  dignity,  which  have  or  may  have  defence, 
commodity  and  safeguard  by  the  said  walls,  ditches,  etc.  ...  or  else  any 
hurt  by  the  same  trenches  .  .  .  shall  in  anywise  be  spared."     /6id.,  chap.  5. 

The  law  of  1531  contains  almost  the  same  words,  and  assesses  the  rate 
"after  the  quantity  of  their  lands,  tenements  and  rents,  by  the  number  of 
acres  and  purchase,  after  the  rate  of  every  person's  portion,  tenure  or 
profit."  23  Hen.  VIII.,  chap.  V.  There  is  no  mention  of  any  varying  degree 
of  benefit  as  the  basis  of  the  rate. 


440 


ESSAYS  IN  TAXATION 


commission  tells  us  that  the  sewers  rate  "is  commonly  imposed 
m  exactly  the  same  manner"  as  the  poor  rate.^ 

Even  American  commentators  have  been  led  astray  by  the 
example  of  the  sewers  rate.^  It  is  true  that  landholders  lying  be- 
yond the  area  m  question  cannot  be  taxed,  because  they  do  not 
belong  to  the  class;  but  the  essential  point  is  that  all  the  members 
of  the  class  are  tajced,  not  according  to  the  benefits  they  receive 
but  accordmg  to  their  abilities.  The  official  commission  tells 
us  explicitly:  -It  is  an  indispensable  condition  (of  the  sewers 
rate)  that  a  person  taxed  may  by  possibility  receive  benefit  from 
the  expenditure  of  the  tax,  and  therefore  holders  of  mountainous 
or  high  ground  which  cannot  be  surrounded,  are  in  general 
exempt.  Still,  the  exact  measure  of  the  benefit  is  not  the  meamre 
of  the  liability  to  be  taxed."^ 

1  Report  of  the  Poor  Law  Commisdmers  on  Local  Taxation,  p.  22 
Cooloy,  Taxation,  chap.  xx.  Baumann,  Betterment  (1893),  p.  6.  cor- 
rectly enough  calls  attention  to  this:  "It  is  most  important  not  to  confuse 
rating  zones  .  .  .  with  betterment.  All  the  individuals  within  a  raUnrzone 
pay  the  same  proportion  irrespective  of  the  quantum  of  benefit  which  each 
individual  may  receive.  But  the  quantum  of  benefit  received  by  the  indi- 
vidual  is  the  essence  of  betterment."  ^ 

*  Report  of  the  Poor  Law  Commissioners  on  I^al  Taxation,  p.  65.  The 
statement  m  the  text  is  strictly  true  of  the  ordinary  sewers  rate  Yet  in 
more  recent  years  there  is  an  occasional  instance  of  a  charge  und;r  sp^cia^ 

fited"h,'t  '^  k"'T  ""  '"^-  ""u\""''^  "  ^^^'^'^  -^-  ^-  th"pertyTen^ 
fited,  but  where  It  is  permissible  to  levy  a  charge  on  each  separate  piece  T( 

land  according  to  the  benefits  specially  derived.  These  isolated  e4mpl^ 
would  indeed  be  precedents  for  "betterment  taxation"  or  a.ssessmentTcTord! 
mg  to  special  benefit  So  the  Metropolitan  Sewers  Act  of  1848  gTve  he  com- 
missioners power  to  levy  the  charge  on  the  various  "lands  or  tenemen'sTn 

TaTor  rhen  '^l  ZT'  !^"^^^'/  ^'  '^°^*^^^  ^"^"^^  ^  ^^^^  sew:rW:r" 
such  wo^k^  nr     h  ^^  tenements  specially  benefited  or  drained  by 

such  works,  or  when  in  any  other  case  an  assessment  according  to  frontace 
shall  appear  to  the  commissioner  inequitable,  then  in  such  pror^rtion  "s  the 

such  work.  11  and  12  Vict.,  chap,  cxii.,  sec.  81.  This  is  quoted  in  tho 
Orange  Book  of  the  Lonrlon  County  Council  But  the  compiWr  Char^^^^^ 
manvTlh  ^h""'  ^^^^^ "^^^^"^^  ^^^^'^^"'^^^  ^«*--"  «-h  cases  and 
mctional  only.  He  may  have  been  led  a.stray  by  the  Revort  of  Ihp  ^Phrt 
Commtteeof  the  House  of  Lords  on  Conservancy  B^rdT m^L  in  wh  ch 
accepted  the  statement  of  one  of  the  witnesses  of  "the  principle  introduced 
by  the  statiite  of  Henry  VIII.,  and  observed  ever  sinc^of  SngTn  ~ 

latufe  of'  H  "'^'  vuT"^  ^"  '^'^  ^^^^^^"^^^  '^''^  ^  /?^Por/,T  The 

benefit  ^"^^  "  "^  """  '^^'^  ^'^^^^  '^^^  ^"'^  «^  ^  Wctional 

As  to  the  later  sewer  acts,  it  has  been  repeatedly  decided  that  "if  prop- 


THE  BETTERMENT  TAX 


441 


A  possible  approximation  to  the  principle  of  benefits  is  found 
in  the  English  lighting  and  watching  rates,  where  a  distinction 
is  drawn  between  land  proper  and  improved  property,  and  where 
the  occupiers  of  land  pay  only  one-third  as  much  as  the  occupiers 
of  houses  and  other  buildings.^  Whether  this  act  really  had 
in  mind  the  question  of  benefit  at  all  is  doubtful.  The  question 
assuredly  played  no  role  in  the  adoption  of  the  present  rule  under 
which  the  ordinary  poor  rate  is  charged  upon  only  one-half 
of  the  rateable  value  of  land.  Even  if  the  matter  of  benefit  was 
considered  in  the  lighting  and  watching  rate  act,  it  must  be 
remembered  that  here  there  are  still  only  two  classes — lands 
and  improvements — and  that  the  charge  upon  the  individual 
occupier  is  not  proportioned  to  the  special  benefits  he  receives; 

erty  is  situate  within  the  area  benefited  by  the  sewers,  it  must  contribute 
without  any  reference  to  the  amount  of  benefit  derived."  See  Reg.  vs. 
Head,  3  B.  &  S.  419;  32  L.  J.  M.  C.  115;  9  Jur.  (N.  S.)  871;  8  L.  T.  708;  11 
W.  R.  339.  Cf.  Boyle  and  Davies,  The  Principles  of  Rating  practically  co?i- 
sidered,  1890,  p.  426. 

Mr.  Edwin  Cannan,  in  his  book  mentioned  above,  which  appeared  since 
the  above  was  originally  published,  seems  to  be  guilty  of  the  same  confusion. 
In  fact,  he  goes  even  further  and  seems  to  posit  the  benefit  principle  (better- 
ment) and  the  ability  principle  as  two  contrasted,  but  historically  almost 
equally  vahd  bases  of  local  taxation.  Cf.  The  History  of  Local  Rates  in  Eng- 
land, p.  50.  As  a  matter  of  fact,  however,  with  only  two  exceptions  noted 
supra,  p.  434,  every  one  of  the  instances  of  so-called  benefit  rates  which  he 
adduces  is  an  example  only  of  jurisdictional  benefit.  Thus  the  act  providing 
for  the  rebuilding  of  the  Scarboro  pier  in  1546,  printed  in  full  in  Cannan, 
pp.  35-37,  mentions  only  that  if  the  pier  were  so  repaired,  all  the  lands  and 
houses  within  the  precincts  of  the  town  "might  be  set  or  letten  for  much 
greater  rents  or  farms,"  and  then  proceeds  to  levy  one-fifth  of  the  rents  on  all 
owners  irrespective  of  whether  the  particular  rent  was  increased  or  not.  The 
next  case,  the  act  of  1566  for  the  preservation  of  grain  {op.  cit.,  pp.  41-42), 
levies  a  tax  on  all  lands  according  to  quantity,  to  defray  the  expense  of  ex- 
terminating birds  and  vermin,  irrespective  of  whether  the  particular  piece 
of  land  was  benefited  or  not.  So  the  act  of  1555  for  re-edifying  forts  in 
Scotland  (ibid.)  taxes  all  property  owners  in  the  four  counties  according  to  the 
size  of  their  estates,  their  profits,  or  "other  commodities  there."  The  few 
remaining  cases  mentioned  by  Cannan  cannot  even  remotely  be  regarded 
as  betterment  rates. 

If  the  distinction  between  a  special  benefit  and  a  jurisdictional  benefit 
is  borne  in  mind,  and  if,  as  is  proper,  the  term  "benefit  principle"  is  re- 
served for  the  former,  it  will  be  realized  that  to  put  the  benefit  principle 
on  an  alleged  equality  with  the  ability  principle  in  local  taxation  as  Mr. 
Cannan  does  is  to  present  a  distorted  view  of  the  real  state  of  affairs. 
Hallgarten,  Die  komtnunale  Besteuerung  des  unverdienten  W ertzuvmchses  in 
England,  Stuttgart,  1906,  pp.  46-47,  accepts  my  position. 

1  Lighting  and  Watching  Act  of  1833.  See  also  18  and  19  Vict.,  chap. 
120,  sec.  165. 


I 


442 


ESSAYS  I\  TAXATIOX 


THE  BETTERMENT  TAX 


443 


he  is  thrown  into  a  general  class  with  all  others  in  the  same 

t^hT^^ilii:'  t'^\'!^  ^^^T^^  -->^  -^  pays  aecorXg 
to  his  abi  ity.^    The  lighting  and  watching  act,  however  beine 

optional,  IS  now  in  force  only  in  a  few  hundrcnl  rurJparis^^^^^ 

parishes  the  lighting  and  watching  rates,  like  all  the  other  Eng- 
lish  local  rates,  are  at  present  commonly  levied  in  exactlv  the 

rhe":t~r?  ^'  "^'^^'^^  '''  '^'^'^^■•'"'^^  *o  '^^  -^ility 
The  English  rates  are  thus  nothing  but  taxes— special  taxes 
at  .s  true,  but  levied  according  to  the  principle  of  allSt  S 

0™™B»r"''"'"^  ^^  ■"'•  ""^" '"  ^'^  '»"«'*''"'  of  P'^cedent.  in  the 
mal'^"nn''r  ^'^^^  "'^'^''^  '^  disregarded  in  practice,"  and  the  rates  are 

i^mH^ieS'io'  ho  ^r^at  irZr:"en?/l9%?''^  ^'j'^'  '"'  '""'''  »*-  "- 

As  a  matter  of  fact,  the  only  examples  of  "benpT^^^^         ^'au    .i 
mission  are  the  sewers  rate  nnH  f K^  w!!i!f-        ^  ,  adduced  by  the  com- 

mer  the  asse„Ty  fc^ge   '^^^^^^^^^  ^^  ^^^  ^- 

adduced  by  the  commission  Xft  of  a  dZ^^Untemr^,      '  only  examples 


tion,  on  faculty  or  ability  to  pay.  Whether  the  local  expenditure 
is  defrayed  by  one  general  tax,  as  in  some  counties,  or  by  a 
number  of  special  taxes,  as  in  England,  is  immaterial — in  each 
case  we  are  dealing  with  a  tax  proper.^ 

But  when  we  leave  the  principle  of  ability — as  measured 
by  property  or  by  rental  value  or  by  any  other  test — and  come 
to  a  payment  which  differs  in  each  particular  case,  and  which 
is  proportioned  to  the  special  or  exclusive  benefit  accruing  to  the 
particular  individual,  it  is  apparent  that  we  are  dealing  with 
a  very  different  kind  of  charge.  Instead  of  the  principle  of 
faculty,  we  now  have  the  principle  of  equivalents.  The  charge 
is  not  a  rate  or  tax  except  in  the  wider  sense  that  every  com- 
pulsory charge  levied  by  government  may  be  called  a  tax, 
because  it  can  be  imposed  only  by  virtue  of  the  power  of  taxa- 
tion. As  we  have  seen  above,  however,  the  taxing  power  may 
manifest  itself  in  different  forms;  a  local  rate  is  an  example 
of  one  form,  a  highway  toll  or  a  cab  license  fee  of  another,  a 
betterment  charge  of  still  another.  Few  Englishmen  would 
say  that  a  highway  toll  or  a  cab  license  is  a  rate  or  tax;  yet  a 
toll  and  a  tax  differ  from  each  other  scarcely  more  than  do  a 
local  rate  and  a  betterment  charge.  A  local  rate  is  levied  for 
the  purposes  of  the  whole  community  or  of  a  definite  class  of 
the  community,  according  to  the  principle  of  capacity  or  ability 
to  pay;  a  highway  toll  or  a  cab  license  fee  or  a  betterment 
charge  is  imposed  on  particular  persons  for  special  benefits 
accruing  to  the  individual  as  such. 

Thus  the  problem  is  solved.  A  betterment  charge  (or  special 
assessment)  is  at  once  a  tax  and  not  a  tax.  It  is  a  tax  in  the 
sense  that  all  compulsory  charges  are  taxes,  because  they  are 
imposed  by  the  taxing  power  of  government.  But  it  is  not  a 
tax  in  the  narrower  and  common  sense  of  the  term.  It  is  not  a 
tax  in  the  sense  that  the  income  tax  or  the  house  duty  is  a  tax; 
it  is  not  a  tax  in  the  sense  that  a  local  rate  is  a  tax;  it  is  just 
as  much  or  as  little  of  a  tax  as  a  marriage  license  fee.  If  we 
persist  in  employing  the  term  tax  for  all  manifestations  of  the 
taxing  power,  it  will  be  necessary  to  coin  a  new  word  for  taxes 

1  Professor  Bastable,  Public  Finance,  p.  364,  thus  errs  in  stating  that  the 
English  local  rates  are  "measured  for  each  payer  by  the  benefit  of  the  serv- 
ice," and  that  "local  taxation  should  be  in  proportion  to  advantage."  In 
Rex  vs.  Mast,  6  T.  R.  154,  the  principle  of  local  taxation  is  laid  down  that 
"each  inhabitant  should  contribute  according  to  his  ability,  which  is  to  be 
ascertained  by  his  possessions  in  the  parish."  Cf.  also  Boyle  and  Davies, 
op.  cit.,  p.  99. 


I  > 


444 


ESSAYS  IN  TAXATION 


THE  BETTERMENT  TAX 


445 


! 


.1 1. 


<l 


m  the  narrower  sense,  as  distinguished  from  fees  and  special 
assessments.  It  is  the  thing,  not  the  name,  that  is  important; 
and  the  confusion  has  arisen  simply  from  the  fact  that  we 
employ  the  same  term,  sometimes  for  the  one  conception 
sometimes  for  the  other.  Much  trouble  would  be  avoided  if 
the  payment  were  called  simply  a  betterment  charge  or  a 
special  assessment,  as  opposed  to  a  local  rate  or  tax.^ 

III.  The  Principle 

The  theory  of  the  betterment  charge  or  assessment  according 
to  benefits  IS  very  simple.  It  rests  upon  the  almost  axiomatic 
principle  that  if  the  government  by  some  positive  action 
confers  upon  an  individual  a  particular  measurable  advantage 
It  IS  only  fair  to  the  community  that  he  should  pay  for  it.  The 
facts  may  be  m  question,  for  it  may  happen  that  the  particular 
advantage  is  only  ostensible,  or  that  the  special  benefit  is  not 

ZuZ'^ni  ^^'^^  ^'^^  ^^"'''  *^'  P™'^P^"  ^^^°^« 

In  our  discussion  of  the  single  tax,  it  was  pointed  out  that 
there  IS  a  distmction  between  unearned  increment  in  general 
and  the  betterment  principle  in  particular.  The  single  tax  on 
land  values  was  found  to  be  inequitable  because  benefit  is  not 

m^tm^^  contention  of  Baumann,  Betterment,  Worsement,  Recoup- 

m^t  in  f^l'n'  f  :»'LT''u^'T  *^  ^''  Harrison's  statement  thkt  betteV^ 
ment  in  the  United  States  has  been  decided  not  to  be  taxation  rests  on  a 
failure  to  observe  the  distinction  made  in  the  text.    "SpecLl  ^'se^men^^ 
may  indeed  be  "an  exercise  of  the  taxing  power";  and  yet  "^e^term^^^^^^^ 
IS  not  necessarily  the  same  thing  a^  "taxation."    So  als^  Mr  Baumann^^ 

cTptbr  "  ^"^'''  '"'^"^'"'^  ^PP-  '^^^^  ^^«^«  «-  -  completrrcon- 

This  is  a  convenient  place  to  call  attention  to  the  errors  in  Mr  Baumann'a 

tntL^^^'f^.^'i'ir.'''  ^V^'"^-    «^  '^''''^y  "^isunderstanrjudge  cX 
m  imagining  that  that  author  condemns  the  practice  of  estimating  the  ben2^ 

pItT^^  to  each  lot  separately.  As  Mr.  Rosewater  p^nts  out  in  f^^ 
lohtical  Snence  Quarterly,  viii.,  p.  764,  what  Judge  Cooley  reaTy  ZaZ 
proves,  and  what  is  now  quite  generally  held  to  be  unconstiUS  t  the 
practice  o  charging  upon  the  abutting  owner  the  cost  of  the  pSar  im 
provement  m  front  of  his  lot  only,  without  reference  to  the  bSs  along 
the  whole  hne  of  the  work-in  fact,  without  apportionment.  Frlth^s 
niisconception  Mr.  Baumann  ha^  fallen  into  grievous  error.  He  aZ  fai  s 
to  distinguish  the  safeguards  thrown  about  the  exercise  of  eminent  domain 
m  the  Amencan  commonwealths  from  the  procedure  requiredTn  levvfn^ 

SIsToXT:^    ''  ^^^"  T'  ^""'  r^'y  ^-  -cid^t  that  tie  P^ 
ceed^ngs  for  the  two  operations  happen  to  be  joined  together 

There  are  many  other  mistakes  in  the  volume,  as,  for  instance,  the  state- 


the  general  principle  of  taxation,  and  because,  even  if  it  were, 
it  would  not  mean  a  single  tax.  The  benefits  of  general  govern- 
mental action  are  quantitatively  unmeasurable;  we  do  not, 
by  paying  taxes,  purchase  a  definite  amount  of  advantages 
from  the  government  as  we  buy  a  certain  quantity  of  tea  from 
the  grocer.  But  if  the  government  performs  some  special 
service  for  us,  there  is  no  reason  why  the  public  at  large  should 
pay  for  it:  to  the  extent  that  the  community  as  a  whole  is  inter- 
ested in  the  service,  it  is  proper  that  it  should  contribute  to  the 
expense.  If  it  is  wholly  a  matter  of  common  interest,  the 
community  should  pay  all;  if  it  is  wholly  a  matter  of  individual 
benefit,  the  individual  should  pay  all;  if  it  is  partly  common 
and  partly  individual,  the  cost  should  be  divided  and  the  in- 
dividual should  pay  up  to  the  amount  of  his  measurable  special 
benefit.  In  the  one  case,  the  expense  is  met  by  a  tax  or  rate; 
in  the  second,  by  a  fee  or  toll,  or  by  a  special  assessment  or 
betterment  charge;  in  the  third,  by  a  combination  of  both 
methods.  To  object  to  a  betterment  charge  because  it  is  not 
levied  according  to  the  principle  of  ability  to  pay  is  as  illogical 
as  to  object  to  a  tax  because  it  is  not  levied  according  to  the 
special  advantage  derived.  We  must  not  apply  to  one  principle 
of  public  contribution  the  test  peculiar  to  another  principle. 

When,  therefore,  the  local  government  performs  a  definite 
act  and  makes  a  definite  expenditure  the  result  of  which  is  a 
clear  and  measurable  accretion  to  the  value  of  some  particular 
piece  of  property,  every  consideration  of  logic  and  justice  de- 
mands a  special  contribution  by  the  owner  to  defray  this  ex- 
penditure. 

As  a  principle,  this  is  really  no  longer  debatable.  Even  so 
conservative  a  body  as  the  Committee  of  the  English  House 
of  Lords,  after  hearing  all  the  arguments  in  opposition,  has 
recently  come  to  the  conclusion  that — 

"The  principle  of  betterment — in  other  words,  the  principle  that 
persons  whose  property  has  clearly  been  increased  in  market  value  by 
an  improvement  effected  by  local  authorities  should  specially  contrib- 

ment  that  special  assessments  are  unconstitutional  in  Minnesota  (p.  75); 
that  their  constitutionality  is  still  doubtful  in  Illinois  (p.  76) ;  that  Adam 
Smith  lays  down  value  as  the  only  standard  by  which  taxes  can  be  appor- 
tioned (p.  81);  and  that  American  judges  allow  special  assessments  for 
benefit  with  reluctance  (p.  100).  On  p.  80  we  find  the  same  confusion  as 
that  alluded  to  above  in  the  later  work.  Most  of  the  objections  in  this 
later  book  are  too  frivolous  to  deserve  any  reply. 


446 


ESSAYS  IX   TAXATION 


ute  to  the  cost  of  the  improvement-is  not  in  itself  unjust,  and  such 
persons  can  equitably  be  required  to  do  so.« 

This  concession  practically  marks  the  close  of  the  contest 

cLSL'^^I  7k  ?™?P'*''  '"  ^"S'^"'^-  The  methods  of 
carrymg  out  the  pnnciple  are  indeed  debatable;  but  in  its 
broad  Imes,  the  theory  is  now  accepted  in  the  chief  quarter 
where  opposition  could  be  expected.^ 

;=  ^h  ^f^'fu  '^'"'^  discussed  in  connection  with  betterment 
IS  that  o  "worsement."  If  an  individual  has  to  pay  for  a 
benefit  It  was  claimed  that  his  neighbor  should  be  recom- 
pensed for  damages  to  his  property,  caused  by  a  public  im- 
provement. The  committee,  however,  decided  that  injury  to 
property  was  to  be  taken  into  account  only  when  a  betterment 
charge  was  imposed  upon  the  same  owner  for  benefits  accru- 
ing to  his  property  m  the  immediate  neighborhood,  by  the 
veo.  same  improvement.    Further  than  this  it  was  ;mwilling 

K^°'^-^'  '1  °^  ^^"^  "^^^  ^'^'  •* '«  nothing  less  than  a  grotesoue 
absurdity  to  suggest  the  creation  of  new  vested  interer  in 
the  perpetuation  of  such  public  evils  as  overcrowded  and 
msanitaiy  slums  and  m  circuitous  modes  of  communication.' 

Order!  ^T'h"  ^'  H^  °1  ^^^^'  "^  ^*^"  ^  *"  ^^^  Standing 
Orders  of  the  House  of  Lords  adopted  in  July,  1895,  the  legit- 
imacy of  "worsement"  has  been  recognized,  but  o^y  within 
the  above  very  narrow  limits. 

A  plan  sometimes  urged  as  calculated  to  attain  the  same 
results  as  the  betterment  system  is  that  of  "recoupment  "^t 
has  occurred  that  in  making  an  improvement  the  municipal 
^vemmen  or  other  public  body  has  taken  more  lan.l  than 
was  actually  necessary,  and  after  the  execution  of  the  work 

'  Report  of  the  Select  Committee  on  Toim  Improvements,  1894  p  iii 

first^m  tr  hl'?f  '"'^y  °'  betterment  in  England  i.;  inte;^«^g.    The 
brat  bill  was  the  Strand  Improvement  bill  of  1890,  in  which  the  betterment 
provisions  msertcd  by  the  London  County  Council   and  a(lonJ!r)T^.h 
chairman's  draft  report,  were  stnick  out  by  The  SeLrComZtti  If    h" 
House  of  Cbmmons.    The  next  was  the  Cromwell  Road  B^wTw  1  of   892' 

maforUv  of  L^*  Tr°'  "'"'^  r  ^'"^'^''  ""^  ''^  ^he  commlft^  If  a 
majority  of  one.  Then  came  the  London  Improvements  bill  of  1893  irr,^ 
viding  for  a  new  central  street  from  the  Strand  to  Holborn.  TW  paSd  t^ 
House  of  Commons  but  was  defeated  in  the  House  of  Lords'  co2.ee 
Finally  came  the  Tower  Bridge  Southern  Approach  bill  of  1894  whTch  X; 
various  mutations  was  approved  by  the  House  of  Ix,rds'  commiC  !nd  h^ 

IS  termed  an  "improvement  charge."  paymenr, 

»  G.  H.  Blunden,  Local  Taxatim  and  Finance,  1895,  p.  95. 


THE  BETTERMENT  TAX 


447 


has  sold  the  land  at  a  higher  price,  thus  retaining  for  the  com- 
munity the  increment  in  value.  In  was  shown  by  the  testimony 
before  the  Lords'  committee  that,  as  a  matter  of  fact,  these 
transactions  had  generally  resulted  in  loss  rather  than  in  gain; 
but  it  was  claimed  that  this  was  due  in  large  part  to  certain 
defects  in  the  law.  The  committee  reported  itself  ''as  not 
satisfied  that  it  has  ever  been  tried  under  circumstances  cal- 
culated to  make  it  successful."  ^  Subsequent  experience  with 
the  principle,  however,  has  proved  to  be  far  more  satisfactory 
and  the  recent  successful  application  of  the  principle  in  the 
construction  of  the  Kings  Highway  in  London  and  in  various 
other  notable  improvements  has  thus  paved  the  way  for  what 
is  now  being  strongly  urged  in  many  American  states  under 
the  name  of  ''excess  condemnation."  ^ 

It  is  evident,  however,  that  the  real  difficulty  with  betterment 
lies  in  the  details  of  its  execution.  In  the  United  States,  where 
the  system  has  for  a  long  time  been  thoroughly  at  home,  it  has 
been  deemed  sufficient  to  approximate  roughly  to  the  benefits 
conferred.  In  no  department  of  public  contribution  is  it  ever 
possible  to  gauge  with  precision  the  exact  relation  of  the  individ- 
ual to  the  pubUc  purse.  With  special  assessments,  as  with  other 
operations  of  public  finance,  the  best  that  governments  can  do 
is  to  reach  substantial  justice.  The  decision  is  left  to  the  legally 
constituted  authorities,  and  the  assumed  benefit,  which  is  to 
guide  the  authorities  in  their  decision,  is  not  always  necessarily 
the  exact  actual  benefit,  a  fair  approximation  to  the  real  benefit 
being  now  considered  adequate  for  practical  purposes.  This 
result,  however,  has  been  reached  only  after  considerable  expe- 
rience. 

In  England,  on  the  other  hand,  where  the  principle  has  only 
recently  been  introduced,  far  more  solicitude  is  shown,  because 
the  opposition  of  the  vested  interests  is  naturally  stronger. 
The  committee  recommended  certain  rules,  most  of  which  have 
been  incorporated  into  the  Tower  Bridge  Act  of  1895,  which  are 
intended  to  limit  the  charge  to  the  amount  of  actual  benefit,  and 
to  protect  the  owner  against  any  possible  abuse  of  the  system. 

*  "No  sufficient  power  has  ever  yet  been  given  to  the  local  authorities  to 
become  possessed  of  the  improved  properties  without  bujdng  out  all  the 
trade  interests — a  course  which  is  inevitably  attended  with  wasteful  and 
extravagant  expenditure."    Report,  no.  10  (of  recommendations). 

2  This  principle  was  adopted  by  constitutional  amendment  in  Ohio 
in  1912. 


448 


ESSAYS  m  TAXATION 


I 


.1 


He  must  be  notified  not  only  of  the  proposed  charge  before  the 
commencement  of  the  projected  improvement,  but  also  of  the 
alleged  mcrease  m  the  value  of  his  property  within  some  reason- 
able period  after  the  completion  of  the  work.'    Furthermore  if 

or  a  uo^  the  costs  bemg  borne  m  general  by  the  local  authority. 
Finally,  if  the  owner  still  thinks  that  the  charge  exceeds  the 
enhancement  of  value  to  his  property,  he  may  demand  that  the 
local  authority  purchase  the  property  at  its  market  value  ^ 

eJi^^T^'"'""^^-  ^'^  '^^r^t'^S'  the  last  being  almost  id;nti- 
cal  with  the  provisions  of  the  recent  New  Zealand  law  explained 
in  another  chapter.  In  New  Zealand,  it  is  applied  to  progressive 
taxation;  m  England,  it  is  recommended  for  the  betterment 
Charge  In  each  case  it  is  simply  a  protection  of  the  individual 
agamst  arbitrary  administrative  action.  The  other  provision 
as  to  costs  seems  to  be  a  little  unfair  to  the  government,  as  it 
puts  a  premium  on  litigation  and  is  calculated  to  interfere  with 
the  prompt  completion  of  the  work.  All  these  points  are,  how- 
ever matters  of  detail  which  can  easily  be  adjusted 

The  Tower  Bridge  Act  of  1895  was  the  first  of  the  new  Eng- 
lish laws  to  incorporate  the  betterment  principle.  A  few  yeare 
Mer  the  same  principle  was  recognized  in  the  London  County 

.?Zq  /TTTf  *'  ^"*  °^  ^^^^'^  f°"»^<='^  by  a  similar  act 
in  1899."    In  fact  between  1895  and  1902  there  were  no  less 

than  nine  London  County  Council  Improvements  acts  which 

provided  for  betterment  charges.    But  from  then  to  the  end 

ot  the  decade  the  pace  seems  to  have  slackened  and  we  find 

no  more  improvement  acts  at  all.    In  1909-1910,  for  instance, 

the  receipts  from  betterment  charges  iu  the  budget  of  the 

London  County  Council  amounted  only  to  the  paltry  sum  of 

i.o\)o  out  of  a  total  revenue  of  £11,988,699.*     The  system 

seems,  however,  to  be  making  its  way  slowly  throughout  the 

.„,'.i"i'"'!  T"*^  ^^°"^^  ""*'  ^  ^  ''"'rt  that  the  effect  of  the  improvement 
eould  not  be  adequately  test«l,  and  it  should  not  be  so  long  as  to  mlk^the 
property  mtended  to  be  charged  suffer  in  its  market  value  by  fhe  su^ns  on 
of  the  decision  as  to  the  charge."  Report,  no.  3.  In  the  Act  of  1895  the 
limits  are  twelve  months  and  three  years.    58  and  59  Vict.,  ch.  c^i^fjili 

I  Report,  no.  7.    The  clause  as  adopted  in  the  Act  of  1895  sec  36  r9)  nro 

*  62  and  63  Vict.  ch.  crlxvi! 

^  London  StaHstics,  1010-1911,  vol.  21,  p.  413. 


THE  BETTERMENT  TAX 


449 


country,  for  the  Housing  and  Town  Planning  Act  of  1909  which 
is  of  general  application,  contains  the  following  clause: 


(( 


Where  by  the  making  of  any  town  planning  scheme  any  property 
is  increased  in  value,  the  responsible  authorities,  if  they  make  a  claim 
for  the  purpose  within  the  time  (if  any)  limited  by  the  scheme  .  .  . 
shall  be  entitled  to  recover  from  any  person  whose  property  is  so  in- 
creased in  value  one-half  of  the  amount  of  that  increase."  ^ 

Allowance,  moreover,  is  made  for  this  in  the  new  land  value 
taxes  referred  to  below,^  by  the  following  provision:  "When  any 
capital  sum  or  any  instalment  of  a  capital  sum  has  been  paid 
to  any  rating  authority  in  respect  to  the  increased  or  enhanced 
value  of  any  land  due  to  any  improvements  made  or  other  action 
taken  by  the  authority,  the  amount  of  that  capital  sum  shall 
be  deducted ''  in  estimating  the  increment  value  duty  or  site 
value  duty  or  reversion  duty.^ 

The  benefit  principle,  even  though  it  is  not  applicable  to 
taxation  proper,  has  thus  its  imdoubted  place  in  the  sphere  of 
local  revenue.  That  it  is  liable  to  abuse  may  be  conceded ;  ^  but 
so  is  the  principle  of  ability  to  pay.  Taxes,  like  special  assess- 
ments, have  not  always  been  levied  with  perfect  fairness;  but 
the  departure  from  fairness  must  in  these  two  cases  be  measured 
by  entirely  different  standards.  The  system  of  special  assess- 
ments, as  has  already  been  pointed  out,^  embodies  a  part  at 
least  of  the  truth  in  the  unlearned  increment  doctrine.  Dr. 
Rosewater  puts  the  point  admirably  as  follows:^  — 

"  Special  assessment  undoubtedly  transforms  a  certain  part  of  the 
enhancement  of  land  values  from  an  unearned  increment  into  an  earned 
increment.  It  does  this  at  the  very  time  that  the  benefit  arises,  thus 
avoiding  every  taint  of  confiscation  of  vested  interests.  Through  it 
may  be  secured  the  chief  advantages  of  the  appropriation  of  the  future 
unearned  increment,  vothout  destroying  the  healthful  stimulus  arising 
from  the  private  ownership  of  landed  property.    The  total  increase 

*  Ed.  VII.,  ch.  xUv.,  sec.  58,  subsec.  (3). 

2  Cf.  infra,  chap.  xvii. 

»  The  Finance  (1909-1910)  Act,  1910, 10  Ed.  VII.,  ch.  viii.,  sec.  36. 

^  For  a  history  of  these  abuses,  see  Rosewater,  Special  Assessments,  chap, 
iii.;  also  ibid.,  pp.  142-144. 

^  George  A.  Black,  The  History  of  the  Municipal  Ownership  of  Land  on 
Manhattan  Island,  p.  78.  Columbia  University  Studies  in  History,  Eco- 
nomics and  Public  Law,  vol.  i.,  no.  3. 

^  Rosewater,  Special  Assessments,  p.  140.  Cf.  the  articles  on  ''The  Bet- 
terment Tax,"  by  the  Duke  of  Argyll  and  by  John  Rae,  in  Contemporary 
Review,  vols.  Ivii.  and  Iviii. 


450 


ESSAYS  IN  TAXATION 


\^ 


^* 


IS  .seldom  appropriated,  but  only  so  much  as  is  required  to  defray  that 

hare  of  the  cost  of  the  particular  improvement  which  mayleZent 

the  speml  benefit  conferred.    We  have  here  no  uncharitable  begrudg- 

h!  tf  T  '"'  ""^^"^u  '^"f  *°  ^o'^ditions  other  than  those  created  by 
the  party  who  reaps  the  advantage.  All  that  is  demanded  is  that  when 
a  person  secures  an  enrichment  to  his  estate,  and  the  expense  i7not 

^Z.t,  hi"'  T\^.  ^r  ^^  ^^'"^  ^^^'-^'^  '"^^  i^«t-^-^  the  tax- 
paying  pubhc-he  shall  make  compensation  therefor.    This  is  the  true 

equitable  principle.    The  contributor  pays  not  alone  betuL  he  ob! 
^Xn  ^rf^'but  because  that  benefit  is  joined  to  an  expense  the 

u^n  th.  .h     n   ^"t  \^''''  ''''^''^  ^^'^  "P^^  ^i«  ^^oulders,  than 
upon  the  shoulders  of  others  not  specially  benefited." 

In  the  United  States  the  betterment  principle  has  long  been 
iirmly  rooted  m  the  revenue  system;  and  although  there  may  be 
particular  cases  in  which  it  has  not  worked  well,  the  evidence 
of  experience  and  the  popular  verdict  as  to  the  methods  em- 
ployed are  overwhelmingly  in  its  favor.  On  the  continent  of 
Europe  the  system  is  now  fast  spreading  because  of  the  growing 
importance  of  mumcipal  finance  and  of  the  more  caref ul  analy- 

lT.d  Jn  .r  /^'""^PT'^P^"'-  ^^^^^^^'  ^h»^h  has  taken  the 
lead  m  the  reform  of  the  national  fiscal  system,  cannot  afford 
much  longer  to  lag  behind  in  the  movement  for  the  just  distribu- 
tion of  ocal  burdens.  Without  the  application  of  the  betterment 
principle,  such  justice  can  scarcely  be  secured. 


CHAPTER  XVI 

RECENT  REFORMS  IN  TAXATION.  I.  THE  REFORMS 

OF  1893-1895 

Industrial  democracy  is  responsible  for  many  changes,  but 
few  are  more  significant  than  those  effected  in  the  fiscal  methods 
of  recent  times.  In  framing  these  newer  systems  modern  nations 
have  been  confronted  by  two  fundamental  problems.  The  first 
is  that  of  bringing  about  greater  justice  in  distributing  the 
weight  of  taxation  among  different  classes  of  the  conomimity; 
the  second  is  that  of  correctly  apportioning  the  burdens  among 
the  various  spheres  of  government. 

The  second  problem,  although  of  less  importance  in  national 
than  in  federal  states,  has  everywhere  attracted  an  increasing 
amount  of  attention,  owing  to  the  demands  made  by  industrial 
life  upon  political  organizations,  and  to  the  growing  complexity 
in  the  relations  between  co-ordinate  and  subordinate  govern- 
ments. In  former  times,  when  local  expenditures  were  insignif- 
icant, and  when  the  geographical  aspect  of  industrial  relations 
was  simple  in  the  extreme,  the  question  of  the  due  apportion- 
ment of  public  revenues  among  independent  or  overlapping 
jurisdictions  scarcely  existed. 

Important  though  this  be,  the  growth  of  industrial  democracy 
has  brought  into  still  more  prominent  relief  the  difficulties  of 
the  first  problem.  Revenue  methods,  as  they  came  down  to  us 
from  bygone  centuries,  were  defective  in  one  of  two  ways. 
In  some  cases  they  were  simply  survivals  of  a  system  originally 
just,  but  which  was  calculated  for  more  or  less  primitive  eco- 
nomic conditions,  or  at  all  events  for  an  economic  life  which, 
whether  primitive  or  not,  was  fundamentally  different  from 
that  of  modern  industrial  society.  Since  political  conditions, 
and  therefore  fiscal  measures,  depend  in  last  resort  largely  on 
social  and  economic  relations,  it  was  but  natural  that  the  revenue 
system  should  become  antiquated,  and  that  what  was  conceived 
in  justice  should  ripen  into  practical  injustice.  In  many  places 
to-day  the  fiscal  demands  of  the  new  social  democracy  are  legiti- 

451 


llli^ 


i-- *■■''-*'■  ■at"  >'*!- 


452 


ESSAYS  IX   TAXATION 


mate  protests  against  the  continuance  of  mediaeval  survivals 
in  modern  life. 

In  other  cases,  revenue  systems  were  painfully  lacking  in 
another  way.  It  is  unfortunately  true  that  the  dominant  social 
class  has  often  succeeded  in  strengthening  its  hold  by  thoroughly 
selfish  fiscal  expedients.  In  such  cases  there  was  no  pretence  of 
equity  even  in  the  original  imposition  of  the  system.  It  did  not 
need  to  grow  bad,  because  it  was  bad  from  the  very  start;  it 
was  based  not  on  justice,  but  on  might.  With  the  growth  of 
mdustrial  democracy,  however,  the  maintenance  of  the  old-time 
abuses  became  increasingly  difficult;  one  by  one  they  were 
recognized  as  such,  to  be  lopped  off  at  the  first  opportunity. 
In  order  to  establish  the  long-delayed  equities,  it  was  necessary 
not  only  to  pull  down  but  to  build  up.  Some,  at  least,  of  the 
recent  changes  which  in  themselves  seem  extremely  radical,  will 
therefore  appear  less  extreme  when  regarded  as  parts  of  a  larger 
whole— as  a  sort  of  compensation  for  what  there  is  still  left  of 
injustice  in  existing  systems. 

Thus  it  is  that  tax  reform  is  everywhere  in  the  air.  Demanded 
in  sonae  countries  because  of  the  divergence  between  economic 
conditions  and  fiscal  methods,  it  is  urged  in  others  as  a  concession 
to  those  who  have  hitherto  had  less  than  justice.  In  both  cases 
it  is  a  product  of  modern  industry  and  of  modem  democracy. 

In  this  chapter  it  is  proposed  to  call  attention  to  the  great 
changes  introduced  toward  the  close  of  the  nineteenth  century 
in  such  widely  different  countries  as  England  and  Holland,  New 
Zealand  and  Prussia— changes,  all  of  them  effected  within  a 
period  of  scarcely  more  than  twelve  months,  and  springing  from 
the  same  general  desire  to  realize  the  principles  of  justice  in  the 
relation  of  the  citizen  to  the  public  purse. 

I.  England 

As  in  so  many  other  domains  of  political  science,  England 
has  here  again  taken  the  lead.  The  English  are  not  much  given 
to  abstract  reasoning  in  politics;  but  in  the  practical  working 
out  of  political  ideals,  England  has  usually  led  the  way.  In 
finance  she  has  taken  a  similar  lead.  She  was  the  first  important 
nation  to  restrict  the  scope  of  taxes  on  consumption  and  to 
introduce  the  income  tax;  and  during  the  nineties,  while  scien- 
tists the  world  over  were  debating  the  problem  of  lessening 
the  burdens  on  the  lower  and  middle  classes,  she  boldly  took 
steps  which  in  many  other  countries  would,  to  say  the  least, 


RECENT  REFORMS  IN  TAXATION 


453 


have  been  deemed  premature.  The  three  great  reforms  accom- 
plished in  England  in  1894  were  the  extension  of  the  inheritance 
tax,  the  introduction  of  the  progressive  principle,  and  the  increase 
of  the  minimum  of  subsistence.    Let  us  discuss  these  in  turn. 

The  principle  of  the  inheritance  tax  was  not  new  in  England ; 
but  its  application  had  hitherto  been  very  unsatisfactory.  What 
are  generally  called  the  death  duties  were  until  the  recent  change 
composed  of  the  following  elements:  (1)  probate  duty,  a  tax 
of  about  three  per  cent  on  personal  property  passing  by  will  or 
intestacy;  (2)  account  duty,  a  similar  tax  on  gifts  of  personalty; 
(3)  legacy  duty,  practically  a  tax  on  collateral  successions  to 
personalty,  graded  according  to  relationship;  (4)  succession 
duty,  as  altered  in  1888,  a  tax  on  realty,  settled  personalty  and 
leaseholds,  with  higher  rates  for  collaterals  than  for  lineals;  (5) 
estate  duty,  an  additional  tax,  since  1889,  of  one  per  cent  on  all 
estates,  real  and  personal,  over  £10,000.  These  five  taxes  really 
consisted  of  two  classes:  the  one,  represented  by  the  probate 
duty,  being  a  tax  on  the  total  amount  of  the  property,  irrespec- 
tive of  the  manner  in  which  it  was  divided,  or  of  the  persons  to 
whom  it  went;  the  other,  represented  by  the  legacy  and  succes- 
sion duties,  being  a  tax  not  on  the  body  of  the  estate,  but  on  the 
separate  shares  received  by  collaterals  and  outsiders.  These  five 
taxes  constituted  a  complex  whole,  bristling  with  anomahes 
and  inequalities,  of  which  the  most  important  was  the  distinc- 
tion made  between  realty  and  personalty,  the  latter  not  only 
being  taxed  more  heavily,  but  being  subject  to  more  complicated 
and  burdensome  rules.  The  act  of  1894  ^  endeavored  to  remove 
these  inequalities  by  imposing,  in  lieu  of  most  of  the  previously 
existing  taxes,  a  new  estate  duty. 

This  estate  duty  is  a  tax  on  the  capital  value  of  all  property, 
real  or  personal,  which  passes  on  the  death  of  any  person.  The 
taxes  abolished  are  the  probate  duty,  the  account  duty,  the 
estate  duty  of  1889,  the  succession  duty  on  lineals  and  the  addi- 
tional succession  duty  of  1888,  all  of  which  merged  into  the  new 
estate  duty.  The  only  old  duties  which  continued  were,  as  we 
shall  explain  in  a  moment,  the  legacy  duty,  and,  in  certain  cases, 
the  succession  duty. 

Under  the  former  system  personal  property  was  rated  at  its 

1  The  Finance  Act,  1894,  57  and  58  Vict.  ch.  30.  Cf.  A.  T.  Layton,  The 
Finance  Act,  1894,  in  relation  to  the  New  Estate  Duties,  with  introduction 
and  explanation.  See  also  Table  of  Income  Tax  imposed  by  the  Finance  Act, 
1894,  t^ih  fuU  text  of  act  relating  to  Income  Tax  and  notes  of  explanation. 


454 


ESSAYS  IN  TAXATION 


RECENT  REFORMS  IN  TAXATION 


455 


capital  value,  but  realty  was  estimated  at  a  fictitious  sum  accord- 
ing  to  the  annual  value  and  the  varying  degrees  of  interest  in  the 
property.    In  some  eases  the  tax  was  charged  only  on  the  value 
of  a  life  interest  m  the  property;  and  where  there  was  no  annual 
value  as  m  the  case  of  lands  held  for  speculation,  there  was  no 
tax  at  all     All  these  differences  were  removed  by  the  new  tax. 
which  is  levied  on  the  market  value  of  the  property.    In  the 
same  way  the  tax  on  realty  could  formerly  be  paid  in  instalments 
while  that  on  personalty  was  paid  in  a  lump  sum;  but  now  in 
order  to  equalize  the  taxes,  interest  is  charged  on  the  amouiits 
remaining  due  until  the  final  instalment  is  paid.   Again,  whereas 
^''T  Lu       ^^^*'^^™^"*«  Payable  on  realty  lapsed  with  the 
death  of  the  person  primarily  liable,  they  are  now  a  charge  on  the 

rifif  r^    'fr''\  ^l  ^^^^'^'^-    ^^"^"^^  *^^  t^  applies  to  all 
death-bed  gifts,  which  are  defined  to  comprise  any  gift  of  realty 

or  personalty  made  within  twelve  months  of  death 

It  IS  somewhat  confusing  to  find  side  by  side  with  this  estate 
k  !L^1  '"^n  ^^ttl^^^^t  estate  duty;  but  the  explanation 
IS  simple.  It  IS  a  common  practice  in  England  to  tie  up  prop- 
erty by  means  of  settlements,  so  that  the  beneficiary  is  not 
at  liberty  to  dispose  of  the  property  itself,  but  enjoys  only 
some  interest  m  it,  whether  for  life  or  for  a  term  of  years.  It 
IS  readily  perceived  that,  if  each  beneficiary  were  called  upon 
to  pay  the  tax  on  the  total  value  of  the  estate,  an  injustice 
would  resuU,  especially  if  there  should  be  more  than  one  dev! 
olution  under  the  same  settlement.  It  is  therefore  provided 
m  the  new  law  that  the  estate  duty  shall  be  payable  only  once 
on  the  value  of  the  property,  which  shall  then  be  exempt  from 

In  n  "'  'T^f''"^  ^"^^  *^'  continuance  of  the  settlement. 
In  consideration  of  this  exemption  and  in  order  to  obviate  in 
onon'r^  ^""^nution  in  the  total  yield,  an  additional  tax  of 
one  per  cent  ca  led  the  settlement  estate  duty,  is  imposed  on 
the  principal  value  of  the  property  so  settled.  An  exception 
is  ^^^jomihe  case  of  husbands  and  wives;  and  it  is  further 
provided  that  the  additional  duty  shall  not  be  payable  more 
than  once  during  the  continuance  of  the  settlement, 
tax^on''  point  worth  mention  involves  the  question  of  double 
taxation.  In  the  original  draft  it  was  proposed  to  tax  the 
En  ^'  ^yherever  situated,  of  a  person  domiciled  in  Great 
±5ntain.    It  was  pointed  out,  however,  that  this  might  involve 

£u        T""  ""^r  *^"  ^^'"^^^  ^^""^^  i^^^if  i«^Po«ed  an 
mheritance  tax  on  the  property  lying  within  its  borders     The 


bill  was,  therefore,  amended  so  as  to  permit  the  amount  of 
the  foreign  tax  to  be  deducted  from  the  sum  payable  by  the 
estate  in  England.  This  is  a  simple  solution  of  the  question. 
It  may  also  be  added  that  the  tax  does  not  apply  to  property 
left  to  the  central  or  local  governments,  to  universities,  to 
certain  pensions,  or  to  single  annuities  not  exceeding  £25. 

The  most  significant  feature  of  the  new  estate  duty  was 
the  final  acceptance  of  the  graduated  scale  or  the  system  of 
progressive  taxation.  Under  the  preceding  laws  there  was 
indeed  an  exemption  for  very  small  sums;  but  that  did  not 
mean  progressive  taxation  proper.  In  the  law  of  1894  the 
tax  began  with  a  rate  of  one  per  cent  and  increased  in  twelve 
successive  stages  until  it  reached  eight  per  cent.  Estates  under 
£100  were  not  taxed  at  all;  from  £100  to  £500  the  rate  was  one 
per  cent,  but  so  arranged  that  estates  under  £300  made  a  fixed 
payment  of  30s.,  while  estates  between  £300  and  £500  were 
charged  a  fixed  sum  of  50s.  Obviously  the  rate  was  more  than 
one  per  cent  on  the  lower  figures  of  each  class.  Above  £500 
the  rate  increased  until  the  maximum  rate  was  reached  at  estates 
over  one  million  pounds.^  Even  these  figures  do  not  adequately 
represent  the  real  charge;  for  it  must  be  remembered  that, 
in  addition  to  this  new  estate  duty,  there  still  exist  a  legacy 
duty  and  a  succession  duty.  The  legacy  duty  is  a  tax  at  the 
rate  of  three,  five,  six  and  ten  per  cent,  graded  according  to 
relationship  on  personal  property  going  to  collaterals.  The 
succession  duty  as  changed  by  the  same  law  ^  is  a  similar  tax 

*  The  exact  figures  are: — 


Over         £          100              to          £          500 

1% 

500 

'            1,000 ; 

2% 

"                      1,000 

'                   10,000 

3% 

"                    10,000               ' 

'                   25,000 

4% 

"                   25,000                ' 

50,000 

43^% 

50,000 

75,000 

5% 

75,000 

'                 100,000 

5M% 

"                  100,000                ' 

150,000 

6% 

"                  150,000 

250,000 

6>^% 

250,000                ' 

500,000 

7% 

"                  500,000 

'              1,000,000 

7^% 

"               1,000,000 

8% 

2  Under  the  original  law,  the  rates  were  as  follows: — 

Lineal  issue  and  ancestors 

.     .       1% 

Brothers  and  sisters  and  their  descendants   . 

•          •             -^  /V 

.     .       3% 

Uncles  and  aunts 

•      .       5% 

Great  uncles  and  aunts 

.     .       6% 

Other  persons 

•         •            "  /v 

,     .     10% 

456 


ESSAYS  IN   TAXATION 


RECENT  REFORMS  IN  TAXATION 


457 


'i^ 


1^ 


I*  ■ 


U  6 


applicable  to  realty.  The  two  duties  together  form  a  collateral 
inhentance  tax,  which  must  be  paid  in  addition  to  the  estate 
TV^  the  important  exception  that  estates  not  exceeding 
£1,000  are  subject  only  to  the  latter.  The  net  result  is  that  in 
the  law  of  1894  the  rate  of  inheritance  tax  varied  from  one  to 
eighteen  per  cent  of  the  value  of  the  property. 

These  are  remarkable  figures,  considerably 'exceeding  those 
to  be  found  at  that  time  in  any  other  important  country.' 
When  almost  one-fifth  of  the  property  is  taken  by  the  state, 
as  IS  the  case  with  large  fortunes  going  to  outsiders,  we  are  ap- 
proaching Bentham's  principle  of  escheat.  Compared  to  the  pal- 
tiy  amounts  levied  by  inheritance  taxes  in  America  at  that  time, 
the  English  figures  arecertainly  .striking.  The  introduction  of 
the  progressive  prmciple  was  indeed  hotly  opposed,  and  the  cry 
of  sociahsm  was  raised,  but  all  in  vain;  for  the  Chancellor  of  the 

rT^T!u'^^'"'''f '^  ^^^  principle  of  progression  as  firmly  estab- 
hshed  by  the  weight  of  recent  economic  authority.  He  even  went 
so  far  as  to  say  that  it  was  equally  applicable  in  principle  to  the 
income  tax  and  that  the  sole  reason  for  his  not  introducing  it 
there  was  of  an  administrative  nature.^  The  definite  acceptjmce 
of  the  progressive  principle  in  English  politics  marks  a  most 
important  step  m  the  history  of  public  finance.^ 

Side  by  side  with  this  extension  of  the  principle  of  ability 
to  pay,  went  its  enlargement  in  another  direction.  Under 
the  inheritance  tax  the  large  amounts  have  to  pay  increased 

But  as  lineal  issue  and  ancestors  were  exempted  when  the  pronertv  naiH 

«'^W,fr^',r  ^'k  rr''""  "°^  "O""""'^'  ^i"-  the  neHsTat'^d'u  y 
replaces  the  old  probate  duty.    The  succession  was  levied  at  a  higher  rate 

duty.    They  are  maintained  as  separate  duties  simply  because  of  the  body 

of  legal  decisions  that  has  grown  around  them.  ^ 

'In  some  of  the  Australian  colonics  the  rates  were  slightly  higher     In 

Victoria  estates  of  £100,000  paid  ten  per  cent  direct  tax;  ^d  in  Queensland 

Uri  tltveThigL™''''"''''  ""  '"^"'"  •"'  "'"'■  '^''^  S-i^ ~  of 
"  I"  answer  to  the  question  why  the  income  tax  should  not  be  graduated 
he  replied:  "  n  principle  there  is  nothing  to  be  said  against  suchTSTtcm'- 
indeed  there  is  every  argument  in  its  favor.  The  difficulties  which  lie  in  Us 
ToTlTn  Kr.l!"!r''''''"^^  '"'•  "  P™^"-^-"'  "'''"^-  -hich  as  ye  have 
h1^,  p  5^.  ""^^  *°  °^^"""""-  "-^"^0"  ^P^'''  "^Pril  16,  tS94, 
'  The  fear  that  the  new  tax  portended  a  breaking  up  of  the  larae  landed 
estates  turned  out  to  be  groundless.  The  lawyers  Ln  devi^S^^ 
settlement  which  succeeded,  in  part,  at  least,  in  mitigating  the  rigor  of  the 


rates;  in  the  income  tax,  where  this  was  deemed  impracti- 
cable, a  somewhat  similar  result  was  reached  by  making 
the  smaller  amounts  pay  decreased  rates.  As  a  result  of 
successive  changes,  the  tax  had  been  so  arranged  that  in- 
comes below  £150  were  entirely  exempt,  while  incomes  between 
£150  and  £400  received  an  abatement  of  £120.  Under  the 
new  law  the  desire  to  ease  the  burdens  on  the  lower  classes 
resulted  not  only  in  an  increase  of  the  total  exemption,  but 
in  an  addition  to  the  abatements  and  in  an  enlargement  of 
the  classes  to  which  abatement  is  accorded.  The  limit  of 
total  exemption  was  now  fixed  at  £160;  incomes  between  £160 
and  £400  received  an  abatement  of  £160;  while  incomes  be- 
tween £400  and  £500  were  permitted  to  deduct  £100.  To 
use  technical  language,  while  the  progressive  principle  was 
introduced  in  the  inheritance  tax,  the  degressive  principle  was 
extended  in  the  income  tax.  Both  are  manifestations  of  the 
idea  of  graduation,  according  to  the  doctrine  of  faculty  in  taxa- 
tion.^ 

One  other  change  deserves  mention.  The  landowners  made 
a  strenuous  opposition  to  the  equahzation  of  the  "death  duties," 
maintaining  that  real  estate  already  paid  more  than  its  share 
in  the  shape  of  local  rates.  To  this  objection  two  arguments 
were  opposed.  In  the  first  place  it  was  by  no  means  proved 
that  the  weight  of  the  local  taxes  rests  on  the  landowners. 
Not  only  were  the  taxes  levied  on  the  occupier,  so  that  the 
incidence  was  only  partly,  if  at  all,  on  the  owner;  but  the  land- 
owner was  largely  exempt  from  what  are  known  in  America 
as  special  assessments.  Secondly,  it  was  contended  that  there 
would  be  a  better  prospect  of  securing  an  equitable  system  of 
taxation  if  each  tax  were  made  just  in  itself,  without  regard 
to  the  others.  Yet  attention  was  so  far  paid  to  the  cry  raised 
by  the  landowners  as  to  lead  the  government  to  diminish  the 
burden  of  the  income  tax  resting  on  them.  It  had  long  been  a 
complaint  that  real  estate  was  assessed  in  schedule  A  at  its 
gross  income,  not  at  its  net  income,  thus  not  permitting  de- 
ductions for  repairs.     Under  the  new  act  the  assessment  may 

*  A  few  years  later,  namely  in  1898,  this  principle  was  still  further  ex- 
tended. The  abatements  on  incomes  below  £400  remained  the  same,  but  on 
incomes  from  £400-500  the  abatement  was  increased  from  £100  to  £150; 
and  two  new  grades  were  introduced,  incomes  between  £500-600  enjoying 
an  abatement  of  £120,  and  incomes  between  £600  and  £700  receiving  an 
abatement  of  £100. 


I 


458 


mSAYS  IN  TAXATION 


i 


I 


( 


!^ 


y 


be  reduced  by  one-eighth  in  the  case  of  farms,  and  by  one-sixth 
in  the  case  of  other  buildings.  This  is  at  once  a  substantial 
concession  to  the  landowners,  and  a  decided  improvement  in 
the  theory  of  the  tax  itself.  But  the  change  in  schedule  A  and 
the  great  extension  of  the  exemption  and  abatements  promised 
so  materially  to  diminish  the  yield  that  it  was  deemed  necessary 
to  increase  the  rate  from  sevenpence  in  the  pound,  or  less  than 
three  per  cent,  at  which  it  had  stood  some  time,  to  eightpence 
or  three  and  one-third  per  cent.  ' 

Finally,  attention  must  be  called  to  the  provisions  affecting 
the  relation  between  local  and  national  revenues.     For  some 
time  there  has  been  growing  dissatisfaction  with  the  burden 
of  local  taxation.     Beginning  in  the  thirties  an  attempt  was 
made  to  remove  this  in  part  by  the  device  of  grants-in-aid, 
•  or  subsidies  from  the  general  government  to  the  local  bodies, 
which  were  increased  from  time  to  time.^    In  1888    Mr    Go- 
schen  altered  the  arrangement  by  allotting  to  the  local  bodies 
certain  definite  revenues  hitherto  accruing  to  the  imperial  gov- 
ernment.    These  consisted  of  the  greater  part  of  the  excise 
licenses,  henceforth  known  as  local  taxation  licenses,  and  in 
addition  one-half  of  the  probate  duty  as  then  levied.     The 
law  of  1894  virtually  maintained  this  arrangement  by  appro- 
priating out  of  the  new  estate  duty  to  the  reduction  of  local 
taxation  a  sum  of  one  and  one-half  per  cent  on  the  net  value 
of  the  property  which,  but  for  the  substitution  of  estate  duty 
would  have  been  chargeable  with  probate  duty.    Sir  William 
Harcourt  made  no  attempt,  however,  to  reconsider  the  whole 
question  of  the  relation  between  general  and  local  taxes,  but 
expressly  left  it  open  for  future  discussion.    Further  consider- 
ation  of  this  point-perhaps  the  only  important  point  in  which 
the  English  system  is  still  defective— cannot  much  longer  be 
delayed.  ^ 

It  may  be  interesting  to  note  the  financial  results  of  these 
measures.  While  the  income  tax  at  the  old  figures  was  es- 
timated to  produce  slightly  over  fifteen  millions  sterling,  the 
increase  of  rate  was  almost  counterbalanced  by  the  changes 
above  alluded  to.    Thus  while  in  1894  the  yield  with  a  7d.  rate 

^i1  «S^'T'  '\  ^^^^  ^^^'  ^^  ^^-  '^'^  '^'  yi^ld  was  onlv 
i-i^,S5b,UU0.     On  the  other  hand,  whereas  the  "death  duties" 

had   been  yielding  about  £10,000,000,  the  new  system  con- 
U)ndon,  1911.    Cf.  also  Sidney  Webb,  Grants  in  Aid,  1911. 


RECENT  REFORMS  IN  TAXATION 


459 


siderably  increased  the  yield,  so  that  in  1895-96  the  revenue 
amounted  to  over  fourteen  millions  sterling.  As,  however,  about 
two  and  a  half  millions  went  to  the  reduction  of  local  taxatioiij 
the  net  increase  to  the  imperial  treasury  was  not  very  great. 
The  new  measures  were,  therefore,  intended  not  so  much  to  pro- 
duce more  revenue  as  to  introduce  more  justice  and  to  equalize 
the  burdens  on  the  various  classes  of  taxpayers. 

The  new  budget  thus  marked  a  turning-point  in  English 
finance,  and  proved  itself  very  popular.^  To  have  swept  away 
the  anomalies  of  a  great  system  of  taxation,  to  have  definitely 
introduced  the  principle  of  progression,  to  have  removed  in- 
equalities in  the  income  tax,  and  to  have  greatly  increased  the 
minimum  of  exemption, — ^these  are  achievements  on  which  any 
finance  minister  might  pride  himself.  The  name  of  Sir  William 
Harcourt,  it  may  safely  be  affirmed,  will  not  be  forgotten  in 
the  annals  of  British  finance. 


II.  New  Zealand 

While  England  was  battling  with  these  problems,  a  similar 
movement  was  going  on  at  the  antipodes.^  In  New  Zealand, 
as  in  all  early  communities,  the  original  source  of  revenue  was 
the  general  property  tax.  But  this,  having  obviously  become 
imsuitable  to  modern  conditions,  was  modified  in  several  direc- 
tions. The  three  important  changes  in  the  early  nineties  were 
the  enactment  of  the  income  tax,  the  adoption  of  the  system  of 
graduation,  and  the  exemption  of  improvements  from  the  land 
tax. 

The  first  step  in  the  movement  was  the  passage  of  "The  Land 
and  Income  Assessment "  act  of  1891.^  A  tax  on  land  values  had 
been  imposed  as  far  back  as  1878.  The  rate  was  one  halfpenny 
in  the  pound  on  the  capital  value  of  all  real  estate,  less  the  as- 
sessed value  of  the  improvements.  This  law,  however,  proved 
to  be  very  unpopular,  as  a  hardship  upon  the  farmers.  Accord- 
ingly in  the  following  year,  1879,  the  land  tax  was  abolished  and 
was  replaced  by  a  general  property  tax  of  one  penny  in  the  pound 

*  The  issues  in  the  electoral  campaign  of  1895  did  not  turn  on  the  budget. 
Both  parties  were  committed  to  the  income  tax,  to  the  ''death  duties," 
to  the  principle  of  graduation,  and  to  the  reform  of  local  taxation. 

2  The  present  chapter  deals  only  with  New  Zealand.  For  the  movement 
in  Australia  proper,  see  the  following  chapter. 

3  An  act  to  regulate  the  assessment  of  land  and  income  for  the  purposes 
of  taxation.    Sept.  8,  1891. 


460 


ESSAYS  IN  TAXATION 


RECENT  REFORMS  IN  TAXATION 


461 


« 


on  all  property,  rea  and  personal,  over  £500.  Although  this 
tax  worked  fairly  well  at  first,  it  soon  followed  the  usual  Ltory 
of  the  general  property  tax;  and  as  personal  property  slipped 
out  of  the  assessment  lists,  the  burden  came  to  l)e  felt  severely 
by  the  farmers.  Accordingly,  after  a  long  agitation,  the  general 
property  tax  was  m  turn  abolished.  Although  the  new  law  of 
1891  imposed  a  tax  on  land,  the  government  was  careful  not 
to  repeat  the  mistake  of  1879,  and  therefore  coupled  with  the 
land  tax  a  tax  on  incomes  from  all  other  sources  than  land    The 

lu*'h°'\*!^  ^""^  ^^^  ''"''^  *^  ^^^^  ^^'^"y  distinct  measures, 
although  they  were  generally  coupled  together,  and  were  dealt 
with  in  vanous  sections  of  the  same  act;  but,  although  dis- 
tinct, they  were  complementary.    In  framing  a  scheme  of  in- 
come taxation,  three  possible  methods  may  be  followed     We 
may  attempt  to  reach  the  income  as  a  whole,  from  all  sources 
and  have  a  general  income  tax;  or  we  may  separate  the  sources 
of  income  and  levy  a  distinct  tax  on  each,  as  on  land  incomes, 
on  business  mcomes,  on  professional  incomes,  and  so  forth- 
or,  thirdly,  since  the  yield  of  land  everywhere  forms  so  important 
a  share  of  national  mcome,  we  may  split  the  tax  into  only  two 
l"^J*T^        "^^"^  endeavors  to  hit  the  income  from  land, 
while  the  second  is  intended  to  reach  all  the  other  forms  of  in- 

^°.^t;;  T  ,^  '!'"''«  ^^'"^  °^  '^^l  ^^t'^te,  in  modern  com- 
Zpt  J  Tv  '«/*'"V°"'*"y  '^"Sht  and  sold,  is  approxi- 

^fflr^n.  kT  "'*^  ^^'"^  "^  **^«  ''^««'°«'  't  makes  little 
difference  whether  we  assess  the  land  on  its  income  value  or  on 

^meTC''^  "'■  ■  ^"'^  ^''^'''"^'  ^°"°^"S  the  example  of 
some  of  the  S^ss  commonwealths,  adopted  this  third  method; 
that  IS,  New  Zealand  endeavored  substantially  to  reach  the 

froriaTd^'^nH  ?;  '"'^'''^•^  ^^f  ^^  °"  *^"  capitalized  income 
thr^,!rfi.  by  a^essing  the  income  from  all  other  sources 
through  the  so-called  income  tax.* 

The  mcome  tax  is  levied  on  corporations  (or  "companies") 
and  mdividuals  The  former  are  taxed  on  their  net  income,  bu 
the  security  holders  are  then  exempt.  In  most  cases  profits 
WvTn'l\"°'°°^  Of  Victoria  shortly  thereafter  followed  the  other  princinle  in 
Jan^M  %q™"  '""TV"''-,  ^y  """«  A'''  «°  ™P°^  ^  Tax  on  Incomes  " 
tion  ^'e  r„,»       T""  "^'"^  ^^  ^'"^  f'"-:  °"  '"''"■nea  from  persona Uxer- 

to  £2  -^  ,„H      K^'^""''  P"  P°""^  "P '»  ^•'2<».  sixpence  per  p^und  1 
to  £2,200,  and  eightpence  per  pound  on  larger  amounts-  on  incomeifmm  .k 

produce  of  property  within  Victoria  the  rates  werexictlvT^bTe     Thl^" 

rat^wer.  subsequently  changed  in  1903^5,  altho:^rl'°pt':ip J  wL' 


from  mortgages  are  not  included  in  income,  because  mortgages 
are  treated  as  interests  in  land  and  are  accordingly  subject  to 
the  land  tax.^ 

Individuals  are  assessed  on  their  income  derived  either  from 
business,  or  from  employments  or  emoluments.  This  last  cate- 
gory is  very  broad,  including  profits  from  "the  exercise  of  any 
profession,  employment,  or  vocation  of  any  kind,  or  from  any 
salary,  wages,  allowances,  pension,  stipend,  or  charge  or  annuity 
of  any  kind  not  charged  on  land."  In  order  to  prevent  double 
taxation,  however,  it  is  provided  that  when  any  business  or 
other  income  is  derived  from  land,  a  sum  equal  to  five  per  cent 
on  the  value  of  the  land  assessment  may  be  deducted  from  the 
taxable  income.  Not  only  private  corporations,  but  all  local 
authorities  and  individual  employers,  are  required  to  furnish 
full  lists  and  salaries  of  persons  employed  by  them.  The  income 
tax  is  payable  only  on  the  excess  over  £300,  and  certain  minor 
deductions  are  allowed.  The  rate  is  fixed  by  periodical  acts, 
according  to  the  needs  of  the  colony;  in  1893  ^  it  was  fixed  at  a 
shilling  in  the  pound,  or  five  per  cent.  In  the  case  of  private 
individuals,  incomes  from  £300  to  £1,000  are  charged  two  and 
one-half  per  cent,  while  the  full  rate  is  assessed  only  on  the 
excess  above  £1,000;  in  the  case  of  corporations  the  rate  is  uni- 
formly five  per  cent.  The  £300  exemption  is  accorded  only  to 
persons  domiciled  or  permanently  resident  in  the  colony. 

The  second  half  of  the  general  scheme  of  taxation  is  the  land 
tax.  An  important  and  valuable  feature  of  the  law  is  the  treat- 
ment of  mortgages,  which  are  regarded  for  the  purposes  of  taxa- 
tion as  real  estate.  The  landowner  is  taxed  on  the  value  of  the 
land,  less  the  amount  of  the  mortgage  which  is  required  to  be 
registered;  and  the  mortgagee  is  taxed  on  the  value  of  the  mort- 
gage. Land  under  £500  in  value  is  exempt,  and  accordingly  the 
exemption  is  accorded  to  mortgages  of  the  same  amount.  The 
mortgage,  however,  is  assessed  to  the  mortgagee  at  its  actual 
value — a  provision  of  importance  when  the  value  of  the  security 
does  not  equal  the  mortgage  debt.  The  result  is  that  the  govern- 
ment gets  its  tax  on  the  whole  value  of  the  land,  that  there  is  no 
double  taxation  on  the  mortgagor,  and  that  the  mortgagee  or 

^  But  under  a  later  amendment,  banking,  loan,  building  and  investment 
companies  must  include  in  their  return  of  income  the  income  from  mort- 
gages, and  are  liable  for  income  tax,  not  for  land  tax.  Cf.  the  Land  and  In- 
come Assessment  Act  Amendment  Act,  Oct.  2,  1893. 

2  An  Act  to  impose  a  Land  Tax  and  an  Income  Tax,  Oct.  6,  1893. 


462 


ESSAYS  IN  TAXATION 


« •> 


owner  of  personal  property  loaned  on  the  land  must  bear  his 
due  share  of  taxation.  The  law  does  not  attempt  to  consider 
the  ultimate  incidence  of  the  tax.  The  provisions  apply,  as 
pomted  out  above,  to  corporations  as  well  as  to  individuals,  with 
the  exception  of  banking  and  loan  associations. 

An  interesting  section  is  that  dealing  with  the  tax  on  improve- 
ments, which  are  defined  to  include  "houses  and  buildings, 
fencing,  planting,  draining  of  land,  clearing  from  timber,  scrub' 
or  fern,  laying  down  in  grass  or  pasture,  and  any  other  improve- 
ments whatsoever,  the  benefit  of  which  is  unexhausted  at  the 
time  of  valuation."  In  the  original  law  such  improvements  were 
exempted  up  to  the  value  of  £3,000;  but  under  the  amendment 
of  1893  the  exemption  was  extended  to  the  value  of  all  improve- 
ments, of  whatever  amount,  the  tax  now  bemg  levied  only  on 
the  bare  value  of  the  land.  The  significance  of  this  change  will 
be  estimated  in  a  moment. 

The  most  important  feature  of  the  new  legislation  is  the  adop- 
tion of  the  progressive  system.    The  Australasian  colonies  had 
been  growing  restless  under  the  gradual  aggregation  of  land  into 
the  hands  of  a  few  proprietors,  and  some  of  them  have  attempted 
to  check  the  process  by  a  system  of  progressive  inheritance  taxes, 
like  that  introduced  into  England.    In  New  Zealand,  however, 
the  situation  was  especially  acute.    Two-thirds  of  one  per  cent 
of  the  landowners  held  forty  per  cent  of  the  land  values;  and 
one-eightieth  of  the  rural  landholders  owned  two-fifths  of  all 
the  land  values.    It  was,  therefore,  decided  to  impose  a  pro- 
gressive tax  on  living  landholders,  instead  of  on  the  estates  of 
deceased  property  owners.    Accordingly  in  1891,  a  graduated 
tax  was  imposed  in  addition  to  the  ordinary  land  tax.    The  latter 
was  fixed  at  one  penny  in  the  pound,  while  the  additional  gradu- 
ated tax  began  at  an  eighth  of  a  penny  and  rose  to  a  penny  and 
six-eighths.    In  1893,  however,  the  rate  of  progression  was  still 
further  increased,  in  order  to  obviate  any  diminution  of  revenue 
which  might  result  from  the  complete  exemption  of  all  im- 
provements.    Accordingly,  the  additional  tax  was  made  to  vary 
from  one-eighth  of  a  penny  to  twopence  in  the  pound,  with  the 
result  that  the  largest  estates  now  paid  a  total  land  tax  of  three- 
pence in  the  pound.  ^    But  the  tax  was  even  larger  than  would 


RECENT  REFORMS  IN  TAXATION 


463 


*  The  scale  as  amended  in  1893  was  as  follows: — 
When  the  value  is      £5,000  and  less  than      £10,000 

;;     10.000  "     '•     '•         15.000 

15,000   ••       "       '•  20.000 

20.000   ' 25,000 

25,000 30,000 


one-eighth  o'  a  penny, 
two-eighths  of  a  penny, 
three-eighths  of  a  penny, 
four-eighths  of  a  p)enny. 
five-eighths  t  f  a  penny. 


appear  from  these  figures,  because  of  the  provision  that  in  the 
case  of  the  graduated  tax  the  value  of  the  mortgage  could  not 
be  deducted  from  the  value  of  the  land.  Deduction  was  per- 
mitted only  in  the  ordinary  land  tax,  or  in  the  case  of  estates 
under  £5,000  in  value.  On  the  other  hand,  the  mortgage  itself 
was  never  liable  to  the  graduated  tax.  We  thus  have  for  the 
first  time  in  any  English-speaking  country  a  graduated  scale  in 
a  direct  property  tax.  England  and  her  colonies  led  the  way  not 
only  in  progressive  inheritance  taxes,  but  also  in  progressive 
property  taxes.    The  drift  is  unmistakable. 

It  might  be  thought  by  some  that  the  adoption  of  this  progres- 
sive land  taximpHed  a  process  of  confiscation  by  the  government. 
In  order  to  preclude  all  possibility  of  such  an  interpretation,  the 
New  Zealand  law  had  inserted  an  ingenious  clause,  which  reminds 
us  in  some  respects  of  the  avTihoai^;  in  ancient  Athens.  If  a 
man  thought  that  he  had  been  assessed  too  high  for  the  ex- 
traordinary property  tax  or  liturgy,  as  compared  with  a  neighbor 
who  had  been  passed  over,  he  could  call  upon  the  latter  to  assume 
the  tax;  and  in  case  of  the  neighbor's  refusal,  he  could  demand 
an  "exchange  of  property,"  out  of  the  proceeds  of  which  the 
tax  was  defrayed.  In  New  Zealand  the  government  takes  the 
place  of  the  third  party.  In  other  words,  if  a  taxpayer  thinks 
that  he  is  assessed  too  high,  he  can  call  upon  the  government  to 
purchase  his  land  at  his  own  original  valuation;  he  has  the 
alternative  to  pay  the  tax  at  the  official  valuation  or  to  sell  the 
land  at  his  own  valuation.  It  is  readily  seen  that  in  this  way  no 
property  can  be  confiscated.  On  the  other  hand,  the  govern- 
ment in  its  turn  may  purchase  the  land  at  the  assessed  valuation 
plus  ten  per  cent  additional,  in  case  the  owner  will  not  consent 
to  the  official  valuation.  As  a  matter  of  fact,  advantage  was 
soon  taken  of  the  provision  in  the  case  of  the  so-called  Cheviot 
estate,  of  over  84,000  acres,  which  was  returned  by  the  owners 
in  1892  at  £260,220,  but  which  was  assessed  by  the  gov- 
ernment at  £304,826.  The  government  refused  to  reduce  the 
assessment,  and  the  owners  called  on  the  government  to  pur- 


six-eighths  of  a  penny. 

seven-eighths  of  a  penny, 
one  penny. 

one  penny  and  one-eighth, 
one  penny  and  two-eighths, 
one  p>enny*and  three-eighths, 
one  penny  and  four-eighths, 
one  penny  and  five-eighths, 
one  penny  and  six-eighths, 
one  penny  and  seven-eighths, 
two  pence. 


When  the  value 

is 

£30,000  and  less  than 

£40.000 

<4              «t 

it 

4t 

40,000    " 

(* 

It 

50.000 

it            M 

(t 

t< 

50.000    " 

At 

44 

70.000 

«<            M 

i( 

•  ( 

70,000    •• 

it 

44 

90.000 

M            M 

M 

« 

90,000    •' 

4« 

14 

110.000 

M           M 

M 

•  ( 

110,000    " 

ti 

44 

130.000 

«4            M 

U 

it 

130,000    " 

it 

44 

150.000 

M            M 

M 

ft 

150.000    " 

«« 

44 

170.000 

44            M 

*i 

It 

170,000    •* 

H 

44 

190.000 

(1 

t 

190,000    " 
2in.nnn  or  p 

4. 

xnee 

(4 

da  tha 

210.000 
t  sum 

i 


I 


i 


464 


ESSAYS  IN  TAXATION 


chase  the  property.  This  was  done  in  1893,  and  the  govern- 
ment thereupon  proceeded  to  carve  it  up  into  small  plots  and 
gradually  to  dispose  of  it.^ 

It  remains  to  estimate  the  meaning  of  the  exemption  of  im- 
provements. The  American  newspapers  were  filled  with  ac- 
counts of  the  introduction  of  the  single  tax  in  New  Zealand, 
and  the  enthusiastic  followers  of  Henry  George  were  jubi- 
lant. But  when  the  law  and  the  official  reports  are  carefully 
scrutinized,  the  enthusiasm  seems  to  be  somewhat  misplaced. 

There  can  indeed  be  little  doubt  that  Mr.  George's  views 
exerted  some  influence  in  the  enactment  of  the  law.    It  must, 
however,  be  remembered  in  the  first  place  that  New  Zealand's 
earlier  land-value  tax  had  been  imposed  in  1878,  before  Mr. 
George's  first  pamphlet  had  even  seen  the  light;  and  in  the 
second  place  that  the  provisions  of  the  law  may  be  explained 
without  any  reference  to  those  particular  views.    In  young  and 
rapidly  growing  communities,  concessions  are  frequently  made 
which  would  be  out  of  place  amid  more  settled  industrial  condi- 
tions.   Thus  the  social  effects  of  taxation  or  of  the  remission  of 
taxation  are  clearly  recognized  in  the  laws  of  some  American 
states,  which  exempt  from  assessment  for  a  limited  period  new 
mdustrial  enterprises,  timber  lands  and  various  kinds  of  improve- 
ments on  land.    There  is  in  such  cases  no  implication  that  the 
owners  of  these  establishments  or  forests  or  improvements  are 
free  from  fiscal  obligations  toward  the  state;  for  to  the  extent 
that  they  have  property  or  income,  they  also  are  ultimately 
liable.    But  it  is  deemed  so  desirable  to  foster  these  new  forms 
of  enterprise  that  the  community  as  a  whole  is  willing  to  bear 
the  additional  temporary  burden  in  order  to  realize  more  perma- 
nent benefits.    The  government  of  New  Zealand  stated  at  the 
time  the  bill  was  introduced  that  their  object  was  to  induce 
large  landowners  to  improve  their  lands,  and  thus  to  bring  about 
an  increased  national  production.^    Looked  at  from  this  point 
of  view,  there  is  much  to  be  said  for  the  provision,  which,  how- 
ever, does  not  mean  that  the  small  farmer  was  as  greatly  bene- 

»  Financial  Statement  in  Committee  of  Supply  by  the  Colonial  Treasurer 
1893,  p.  19,  WeUington,  1893. 

2  *'  It  will  be  admitted  that  the  repeal  of  the  tax  on  improvements  should 
have  the  effect  of  encouraging  the  owners  of  large  properties  to  expend 
money  m  improvmg  their  land,  and  thereby  add  to  its  productiveness.  This 
would  be  a  direct  advantage  to  the  colony  as  a  whole,  both  by  causing  an 
expenditure  on  labor,  and  by  adding  to  the  pToducts."— Financial  State- 
ment m  Committee  of  Supply,  1893,  p.  18. 


RECENT  REFORMS  IN  TAXATION 


465 


fited  as  some  might  imagine.  The  official  assessments  show  that, 
whereas  in  the  country  districts  or  counties  the  unimproved 
value  of  the  lands  exceeded  the  value  of  the  improvements,  the 
reverse  was  true  in  the  towns  or  boroughs.  The  figures  for  1893 
are  as  follows:^ — 


Counties  . 
Boroughs  . 


Totals 


Actual  Valxjb 

£85,818,167 

36,406,862 

£122,225,029 


Valttb  of 
Impbovements 

£27,922,735 

18,442,562 

£46,365,297 


Unimproved 
Value 

£57,880,233 
17,907,662 

£75,787,895 


That  is  to  say,  in  the  boroughs  the  improvements  were  worth 
actually  more  than  the  bare  land,  while  in  the  country  districts 
the  land  was  worth  more  than  twice  as  much  as  the  improve- 
ments. 

The  claim  of  the  single  taxers  that  the  farmer  will  benefit 
at  the  expense  of  the  city  lot-owner  is  therefore  questionable  in 
New  Zealand  as  indeed  it  is  in  other  parts  of  the  world.  ^  The 
figures  show  that  the  object  of  the  law  was  not  so  much  to 
discourage  the  urban  landowner  as  to  reach  the  large  rural 
proprietors.  As  between  the  small  farmer  and  the  city  land- 
owner, the  law  was  distinctly  unfavorable  to  the  former,  for 
the  exemption  of  improvements  removed  over  one-half  of  the 
townsman's  tax,  but  less  than  one-third  of  the  farmer's  tax; 
that  is,  it  relatively  increased  the  tax  of  the  farmer.  Were 
the  land  to  be  owned  by  small  farmers,  the  system  would 
have  been  unpopular;  but  it  is  precisely  because  the  land  is  not 
owned  by  small  farmers  that  the  law  was  enacted.  The  exemp- 
tion of  improvements  was  a  corollary  of  the  graduated  tax  on 
land.  When  any  part  of  the  improvements  was  exempt,  the 
tax  was  graduated;  and  when  the  exemption  was  made  complete, 
the  scale  of  graduation  was  increased. 

The  claim  that  the  new  law  meant  the  introduction  of  the 
single  tax  is  still  further  weakened  by  the  fact  that  it  went  hand 
in  hand  with  the  extension  of  the  income  tax  on  other  sources 
than  on  land.  Finally,  the  contention  that  there  now  was  any 
single  tax  at  all  in  New  Zealand  is  rendered  absurd  by  the  fact 
that  in  1894  the  revenues  from  the  land  amounted  to  £285,000 
out  of  a  total  revenue  of  over  four  and  a  quarter  millions,  the 
larger  part  of  which  was  derived  from  indirect  taxes.    In  other 

*  New  Zealand  Official  Year  Book,  1893,  by  E.  J.  von  Dadelszen,  p.  429. 

*  Supra,  pp.  86-91. 


I'l 


466 


ESSAYS  IN  TAXATION 


words,  the  "single"  tax  yielded  about  six  and  a  half  per  cent  of 
the  colonial  revenues,  and  of  course,  when  we  take  into  account 
the  local  revenues,  composed  chiefly  of  the  general  property 
tax,  a  much  smaller  proportion  of  the  total  income.  The  reader 
is  thus  in  a  position  to  judge  how  much  foundation  there  is  for 
the  statement  that  the  prosperity  of  New  Zealand  was  to  be 
ascribed  to  the  "single"  tax.  The  real  intent  of  the  new  legisla- 
tion was  to  make  the  large  property  owners  pay  more  than  they 
had  hitherto  been  paying,  and  to  subject  to  taxation  other  classes 
that  had  hitherto  been  exempt.^  It  was  thus  an  attempt  to 
realize  the  principle  of  faculty  in  taxation. 

III.  Holland 

In  the  review  of  the  tax  reforms  in  England  and  New  Zealand 
we  have  seen  that  the  changes  were  largely  the  outgrowth  of 
popular  agitation;  in  the  states  now  to  be  discussed  the  reforms 
were  more  directly  the  result  of  scientific  discussion.  This  is 
especially  true  of  the  Netherlands,  where  the  tax  laws  in  question 
were  due  to  N.  G.  Pierson,  the  author  of  the  ablest  Dutch  treatise 
on  economics  and  finance.  Mr.  Pierson  was  at  one  time  a 
university  professor,  antl  was  for  many  years  the  president  of 
the  Bank  of  the  Netherlands.  For  several  decades  he  had  been 
devoting  himself  to  the  consideration  of  fiscal  problems,  and  when 
in  1891  he  was  made  Minister  of  Finance,  he  immediately  set 
about  the  task  of  l)ringing  the  tax  system  more  into  accord  with 
the  demands  of  modern  theory.  In  his  budget  for  1892  he 
sounded  the  keynote  of  the  new  program— a  more  equitable 
distribution  of  the  burden  of  taxation — claiming  that  the  poorer 
classes  were  taxed  too  much,  and  the  wealthy  too  little.  The 
problem  was  how  to  restore  an  equilibrium. 

The  Dutch  revenue  system  was  composed  in  large  part  of 
indirect  taxes.  Import  duties,  it  is  true,  were  very  light,  but 
the  internal  revenue  or  excise  taxes  were  still  burdensome.  The 
direct  taxes  comprised,  as  in  France  and  some  other  countries, 
a  land  tax,  a  business  tax,  and  a  "personal  tax"  calculated  ac- 
cording to  house  rent.  The  business  tax  had  grown  to  be  very 
unequal,  being  l)ased  on  rough  outward  signs;  and  the  personal 
tax,  which  took  the  same  proportion  from  large  and  small 

*  "The  end  sought  to  be  attained  by  the  whole  scheme  is  to  compel  con- 
tribution to  the  requirements  of  the  state  according  to  the  ability  of  those 
who  are  called  upon  to  contribute  thereto."  "Statement  by  the  Commis- 
sioner of  Taxes  in  New  Zealand,"  N.  Z.  OJJficial  Year  Book  for  1894,  P-  44. 


RECENT  REFORMS  IN  TAXATION 


467 


rentals,  proved  to  be  a  serious  drain  on  the  poorer  classes. 
Whole  sections  of  the  population,  moreover,  were  virtually 
exempt.    Mr.  Pierson  therefore  proposed  a  four-fold  reform:^ 

(1)  The  abolition  or  decrease  of  the  more  vexatious  excise 
duties;  (2)  the  enlargement  of  the  business  tax  into  a  general 
income  tax;  (3)  the  reconstruction  of  the  personal  tax  through 
the  introduction  of  a  progressive  scale  and  through  other 
changes;  (4)  a  reform  of  local  taxation  so  that  the  local  and 
general  taxes  together  might  form  a  harmonious  whole.  Of 
these  reforms  only  the  first  two  were  accomplished,  when  the 
ministry  was  overthrown  on  an  entirely  different  point.  Yet 
even  these  partial  reforms  represent  a  distinct  step  in  advance 
and  deserve  our  attention.^ 

The  first  step  was  the  reduction  in  the  excise  duties.  In  1892 
the  excise  on  soap  was  abolished,  and  that  on  salt  was  reduced 
from  nine  to  three  florins  per  hundred  kilogrammes.  The  vexa- 
tious registration  duty  on  the  transfer  of  land  was  lowered  from 
6.27  to  2.15  per  cent,  or  in  the  case  of  a  second  transfer  within 
the  same  year  from  1.09  to  0.40  per  cent.  With  the  exception 
of  a  minor  tax  on  meat,  there  were  then  left  only  the  duties  on 
spirits  and  on  sugar,  which  were  retained  as  in  other  countries 
as  essential  features  of  the  tax  system.  This  reform  in  itself 
proved  to  be  a  distinct  relief  to  the  poorer  classes. 

Of  more  importance  were  the  changes  made  in  the  direct  taxes. 
The  business  tax,  akin  to  the  French  patentes,  had  become  in 
many  ways  inadequate  and  unjust,  and  was  now  to  be  replaced 
by  a  tax  on  the  actual,  rather  than  on  the  assumed,  income  and 
was  furthermore  to  be  extended  so  as  to  reach  income  from  other 
sources  than  from  business.  Pierson  deemed  it  wise  to  separate 
this  tax  into  two  parts,  one  of  which  should  apply  to  the  income 
from  property  alone,  while  the  other  should  include  all  other 
incomes.  In  the  first  case,  however,  it  was  thought  best  to 
make  the  tax  in  large  part  one  on  the  property  itself,  rather  than 
on  the  income  from  property.  The  earlier  law  thus  provided 
for  what  is  termed  the  property  tax.^ 

The  question  that  immediately  presents  itself  is:  Why  should 

*  The  best  account  of  the  changes,  of  the  discussion  in  pariiament  and 
of  the  previous  attempts  at  tax  reform,  will  be  found  in  an  elaborate 
article  by  G.  M.  Boissevain,  "Die  neueste  Steuerreform  in  den  Nieder- 
landen,"  in  Finanz-Archiv,  vol.  xi.,  pp.  419-746.  This  also  contains  the 
text  of  the  laws  themselves. 

2  Act  of  Sept.  27,  1892. 


h 


468 


ESSAYS  IN  TAXATION 


RECENT  REFORMS  IN  TAXATION 


469 


I 


there  be  a  separate  property  tax?    The  answer  is:  largely  for 
administrative  purposes.    The  administration  of  the  tax  would 
thereby  be  put  into  the  hands  of  officials  already  familiar  with 
the  land  and  inheritance  taxes,  while  the  income  tax  would  natu- 
rally fall  to  the  officials  acquainted  with  the  business  tax; 
secondly,  the  local  authorities  might  desire  to  add  a  percentage 
to  the  property  tax  rather  than  to  the  income  tax;  thirdly,  it 
would  be  the  most  convenient  method  of  providing  for  a  different 
or  higher  taxation  of  income  derived  from  property  than  of  in- 
come derived  from  labor.    In  addition  to  these  points  the  rather 
doubtful  argument  was  advanced  that  the  same  amount  of 
capital  affords  different  rates  of  income  according  to  the  varying 
security  of  the  principal,  and  that  the  poor  man  who  cannot 
afford  to  make  much  of  a  choice  generally  prefers  securities 
with  higher  rates  of  interest;  to  tax  income  instead  of  capital 
would  thus  be  to  favor  the  rich  man.    Finally,  in  answer  to  the 
objection  that  a  non-dividend-yielding  security  would  also  be 
taxed,  it  was  urged  that  this  could  not  be  avoided  even  under 
an  income  tax;  for  if  the  capital  value  of  a  security  should  fall 
in  any  one  year  more  than  the  amount  of  the  interest  or  of  the 
ordinary  dividend,  the  income  tax  would  be  paid  not  from 
income,  but  from  capital. 

Dubious  as  some  of  these  reasons  were,  they  found  favor  with 
parliament.  Even  in  the  property  tax,  however,  the  principle 
of  mcome  was  not  wholly  abandoned;  for  in  the  case  of  real  es- 
tate the  capital  value  was  fixed  at  twenty  times  the  annual  rev- 
enue, unless  the  owner  elects  to  be  assessed  accordmg  to  selling 
value.  It  may  be  said  in  passing  that  the  property  tax  applies 
only  to  individuals,  not  to  corporations;  and  that  furniture, 
objects  of  art,  scientific  apparatus,  life  msurance  policies  and 
a  few  other  categories  ^  are  not  yet  included  in  taxable  property. 

A  point  of  considerable  importance  is  that  the  old  land  tax 
IS  levied  in  addition  to  the  property  tax.  The  landowners 
had  for  many  years  blocked  the  way  to  any  change  in  the  sys- 
tem by  asserting  that  to  tax  their  land  by  the  land  tax  and 
agam  by  the  property  tax  would  involve  gross  double  taxation. 
Mr.  Pierson,  however,  had  long  ago  espoused  the  capitalization 
theory  of  the  land  tax,  and  had  maintained  that  an  exclusive 
tax  on  land  becomes  a  kind  of  rent-charge,  depressing  the  sell- 

» Such  as  articles  of  food;  the  right  to  pensions  or  annuities;  property  of 
which  the  usufruct  is  enjoyed  by  some  one  else;  debts,  wages  and  other 
income  which  is  yet  due. 


ing  value  of  the  land  by  a  sum  equal  to  the  capitalization  of 
the  tax.  The  new  purchaser,  he  argued,  makes  an  allowance 
for  the  tax  in  the  purchase  price,  and  buys  to  that  extent  an 
exemption  from  future  taxation.  Since,  therefore,  all  other 
owners  of  property  were  to  be  taxed  for  the  first  time,  it  would 
be  unjust  to  exempt  the  landowners  from  the  property  tax. 
The  land  tax  is  a  rent-charge;  the  property  tax  is  a  real  tax. 
The  situation  was  deemed  to  be  the  same  as  in  England,  where 
the  land  tax  exists  side  by  side  with  the  income  tax  on  land. 

Were  this  chapter  anything  more  than  a  bare  summary 
of  recent  legislation,  it  might  be  shown  that  there  was  a  partial 
fallacy  in  Mr.  Pierson's  reasoning.  For  the  theory  of  amortiza- 
tion, as  it  is  called,  holds  good  only  on  the  assumption  that 
the  land  tax  is  exclusive;  while,  as  a  matter  of  fact,  even  under 
the  old  Dutch  system,  there  was  also  a  tax  on  business  or  busi- 
ness property.  Be  that  as  it  may,  Mr.  Pierson's  argument 
prevailed;  but  several  concessions  were  made  to  the  landed 
interest.  The  rate  of  the  land  tax  was  reduced  from  seven  to 
six  per  cent;  the  transfer  duties  on  land  were  abolished;  the 
official  assessment  of  land  for  the  property  tax  was  purposely 
kept  somewhat  below  the  actual  value;  and  land  used  for  agri- 
culture, by  a  legal  fiction  to  be  stated  in  a  moment,  was  exempted 
from  the  income  tax.  In  these  several  ways  it  was  sought  to 
remove  the  imputation  of  double  taxation.  It  may  be  ques- 
tioned, however,  whether  this  object  was  entirely  attained. 

The  fundamental  feature  of  the  new  system  is  the  co- 
ordination of  the  property  tax  with  a  complementary  income 
tax,  for  the  purpose  of  reaching  through  a  combination  of  the 
rates  the  entire  taxable  faculty  of  the  individual.  The  official 
name  of  the  income  tax  is  "tax  on  income  from  occupations 
and  other  incomes,"  ^  although  it  is  generally  called  the  business 
tax.  The  tax  is  levied  on  all  ''gains  and  wages,"  which  are  de- 
fined to  include  "the  amount  of  all  net  revenues  from  business, 
trade,  manual  labor,  occupation  or  enterprise  from  temporary 
work  or  activity  of  any  kind,  from  contractual  or  non-contractual 
profits,  whether  in  cash  or  in  securities."  The  law  applies 
to  corporations  as  well  as  to  individuals,  while  the  property 
tax  applies  only  to  individuals;  but  if  the  corporation  pays 
the  income  tax,  individual  security  holders  are  exempted.  In 
order  to  obviate  the  double  taxation  which  would  result  from 
taxing  business  capital  through  the  property  tax  and  business 
^  Belasting  op  bedrijfs-  en  andere  inkomsten.     Act  of  Oct.  2,  1893. 


470 


ESSAYS  IN  TAXATION 


RECENT  REFORMS  IN  TAXATION 


471 


m 


profits  through  the  income  tax,  recourse  is  had  to  an  expedient 
so  familiar  in  Switzerland  and  also  practised  in  INIa^sachusetts. 
The  property  tax  is  presumed  to  reach  an  income  of  four  per 
cent;  hence  the  income  tax  is  payable  in  almost  all  cases  only 
on  the  surplus  profits  above  four  per  cent.  In  this  way  the 
property  and  the  income  taxes  together  are  deemed  to  reach 
the  whole  income.^  In  the  case  of  capital  invested  in  land,  the 
nicome  is  declared  to  be  legally  equivalent  to  four  per  cent. 
Agricultural  capital  is  hence  exempt  from  the  income  tax,  as 
It  had  previously  been  free  from  the  business  tax,  although  the 
land  IS  liable  to  both  the  property  and  the  land  tax. 

In  respect  of  the  rate  of  taxation  the  new  Dutch  laws  recog- 
nize the  principle  of  differentiation  as  well  as  of  progression. 
To  differentiate  the  rate  by  taxing  incomes  from  property 
more  heavily  than  incomes  from  labor  was,  as  we  know,  one 
of  the  avowed  reasons  for  the  enactment  of  the  two  separate 
laws,  and  did  not  meet  with  much  opposition.    But  when  the 
project  of  graduating  the  tax  was  introduced,  the  discussion, 
as  in  all  such  cases,  grouped  itself  about  two  main  points. 
On  the  one  hand  the  partisans  of  a  strict  proportional  rate 
maintahaed  that  progression  means  socialism  and  confiscation; 
on  the  other  hand  the  extremists  declared  their  belief  in  the 
socio-political   theory  of  taxation,   according  to   which   pro- 
gressive taxation  should  be  utilized  as  an  engine  to  remove 
inequalities  in  fortune.     Pierson  took  the  middle  ground,  de- 
claring his  opposition  to  both  these  theories  and  maintaining 
that  a  moderate  progression  was  a  logical  conclusion  from  the 
theory  of  faculty  in  taxation.     "Progressive  taxation,"  as  he 
put  it,  "must  never  be  a  principle  (as  the  sociahsts  would  have 
it),  but  only  the  apphcation  of  a  principle." 

The  practical  arrangement  was  as  follows:  Property  under 
13,000  florins  is  entirely  exempt;  from  13  to  14,000  the  tax  is 
fl.  2;  from  14  to  15,000  it  is  fl.  4.  If  the  property  exceeds  fl. 
15,000  but  is  less  than  fl.  200,000,  the  tax  is  1.25  per  mill  for 
the  surplus  over  fl.  10,000.  Property  of  fl.  200,000  would 
therefore  be  taxed  fl.  237J^.  For  every  fl.  1,000  above  fl.  200,000 
there  is  an  additional  tax  of  fl.  2.  In  other  words,  there  is  a 
deduction  in  all  cases  for  a  certain  part  of  the  property  (fl. 
10,000) ;  there  is  a  complete  exemption  for  a  minimum  of  sub- 
sistence (fl.  13,000),  and  an  abatement  for  a  somewhat  larger 

iFor  a  fuller  discussion  of  this  arrangement  from  the  standpoint  of 
theory,  see  supra,  p.  102  and  pp.  274-276. 


amount  (fl.  15,000);  and  finally  there  is  a  slightly  progressive 
rate.  For  if  income  on  property  is  reckoned  as  four  per  cent, 
the  property  tax  of  1.25  per  mill  (on  sums  below  fl.  200,000) 
equals  an  income  tax  of  three  and  one-eighth  per  cent;  while 
a  property  tax  of  two  per  mill  (on  sums  above  fl.  200,000) 
equals  an  income  tax  of  five  per  cent.  Owing  to  the  deduction 
of  fl.  10,000  as  well  as  to  the  complete  exemption  of  fl.  13,000 
and  the  abatements  for  fl.  13,000  and  fl.  14,000,  the  property 
tax  computed  as  an  income  tax  would  vary  from  zero  to  almost 
five  per  cent.     This  will  be  seen  from  the  following  table: — 


PROPERTr. 

Tax. 

Amount 

Percentage 

fl. 

fl. 

FEB  Mill. 

OF  Income. 

12,000 

0 

0 

0 

13,000 

2 

0.15 

0.37 

14,000 

4 

0.29 

0.72 

15,000 

6.25 

0.41 

1.02 

20,000 

12.50 

0.62 

1.55 

25,000 

18.75 

0.75 

1.87 

50,000 

50.00 

1.00 

2.50 

100,000 

112.50 

1.12 

2.80  ■ 

150,000 

175.00 

1.17 

2.92 

200,000 

237.50 

1.19 

2.97 

210,000 

257.50 

1.23 

3.07 

220,000 

277.50 

1.26 

3.15 

250,000 

337.50 

1.35 

3.37 

500,000 

837.50 

1.67 

4.19 

1,000,000 

1,837.50 

1.84 

4.59 

3,000,000 

5,837.50 

1.95 

4.86 

5,000,000 

9,837.50 

1.97 

4.92 

10,000,000 

19,837.50 

1.98 

4.96 

20,000,000 

39,837.50 

1.99 

4.98 

In  the  income  tax  it  was  proposed  to  observe  the  same  prin- 
ciple of  graduation,  but  the  rate  was  to  be  less.  Since  fl.  200,000 
is  equivalent  to  fl.  8,000  income,  the  original  plan  was  to  tax 
incomes  from  labor  above  a  certain  minimum  two  per  cent 
up  to  fl.  8,000,  and  three  and  one-fifth  per  cent  above  that, 
instead  of  the  three  and  one-eighth  per  cent  and  five  per  cent 
rates  of  the  property  tax.  That  is,  incomes  from  labor  were 
to  be  taxed  three-eighths  less  than  incomes  from  property. 
It  was  decided,  however,  to  make  the  minimum  of  subsistence 
higher  in  the  income  tax  than  in  the  property  tax,  partly  because 
of  the  existence  of  indirect  taxes,  partly  for  other  reasons. 
The  consequence  was  the  necessity  of  two  schedules  in  the 
income  tax,  one  for  incomes  from  labor  alone,  and  one  for 


Ill 


472 


ESSAYS  IN  TAXATION 


! 


taxpayers  already  subjected  to  the  property  tax.  In  the  former 
case  the  tax  is  levied  only  on  the  surplus  above  fl.  650;  but  as 
the  property  tax  is  levied  only  on  the  surplus  above  fl.  10,000 
(which  corresponds  to  an  income  of  fl.  400),  the  tax  on  incomes 
from  property  is  levied  on  the  surplus  above  fl.  250  (or  the 
difference  between  fl.  650  and  fl.  400).  The  higher  rate,  there- 
fore, begins  m  this  case  not  with  fl.  8,000  (as  in  the  case  of  labor 
incomes),  but  with  fl.  8,200.  This  would  result  in  the  following 
schedules,  which,  although  seemingly  compUcated,  are  the 
results  of  simple  computations: — 

Schedule  B  (for  those  liable  also  to  the  Property  Tax). 

fl''i?'SS?'^^«f  "??"^5f  ^°  .  When  Property  varies 

Tf,  JLi  '^  °  r  •  i"*'^s       between  fl.  1 5,000  and  fl.  200,000. 

Income.    Tax  (mflonna).        Income.  Tax  (in  florins). 


Schedule  A. 
Incomes  from  Labor. 
Income.      Tax  (in  florins). 


<< 


a 


a 


(C 


it 


650  to 

700 

750 

800 

850 

900 

950 
1000 
1050 
1100 
1150 
1200 
1250 
1300 
1350 
1400 
1450 
1500 
1600 


700      1 
750      2 
800      2.75 
850      3.50 
900      4.25 
950      5 
1000      5.75 
1050      6.50 
1100      7.25 
1150.     8 
1200      8.75 
1250      9.50 
1300    10.25 
1350    11 
1400    11.75 
1450    12.50 
1500    13.25 
1600    14 
8200    14+ 
2  per  cent  en  surplus 
over  fl.  1500. 

Over  fl.  8200,  fl.  148 
+3.20  per  cent  on  sur- 
plus over  fl.  8200. 


<< 


n 


(( 


il 


(I 


il 


II 


ti 


u 


ii 


II 


a 


i( 


II 


250  to  300 
350 
400 
450 
500 
550 
600 
650 
700 
750 
800 
850 
900 
950 
1000 
1050 
1150 


300 

350 

400 

450 

500 

550 

600 

650 

700 

750 

800 

850 

900 

950 
1000 
1050 

Over 


II 


n 


(t 


(( 


a 


<( 


(i 


t( 


It 


(( 


ft 


II 


(I 


a 


it 


2      250  to  300 

2.75    300  "  350 

3.50    350 

4.25  400 

5  450 

5.75  500 

6.50  550 

7.25  600 

8  650 

8.75  700 

9.50  750 

10.25  800 

11  850 

11.75  900 

12.50  950 

13.25  1000 

14  1050 

14+  1100 


1.25 
350   2 
400   2.75 
450   3.75 
500   4.25 
550   5 
600   5.75 
650   6.50 
700   7.25 
750   8 
800   8.75 
850   9.50 
900  10.25 
950  11 
1000  11.75 
1050  12.50 
1100  13.25 
1200  14 
Over  1100  14+ 
2  florins  for  every  hun- 
dred florins  on  surplus 


tt 


a 


tc 


(I 


u 


(t 


a 


t( 


t( 


tt 


tt 


tt 


tt 


It 


tt 


tt 


1050 

2  florins  for  every 

hundred    florins    on 

surplus  over  fl.  1050. 

But  if  the  income,  over  fl.  1100. 
together  with  4  per  But  if  the  income, 
cent  on  the  taxable  together  with  4  per 
property,  exceeds  fl.  cent  on  the  taxable 
8150,  a  tax  of  1.20  property,  exceeds  fl. 
per  cent  is  payable  8200,  a  tax  of  1.20  per 
on  the  excess.  cent  is  payable  on  the 

excess. 
When  property  exceeds  fl.  200,000,  the  tax  is 
3.20  on  every  hundred  florins  income  over  fl 
200. 


JHi 


RECENT  REFORMS  IN  TAXATION 


473 


It  may  be  said,  in  passing,  that  there  are  two  additional 
schedules  in  the  income  tax;  corporations  being  taxed  in  all 
cases  two  and  one-half  per  cent,  and  foreign  travelling  sales- 
men paymg  a  fixed  tax  of  fl.  15.  Of  the  administrative  features 
of  the  laws  the  chief  point  is  that  the  returns  both  of  property 
and  of  income  rest  on  the  principle  of  self-assessment,  supple- 
mented by  careful  official  scrutiny. 

After  the  passage  of  these  two  acts  Pierson  prepared  to 
undertake  the  reform  of  the  personal  tax  and  of  the  local  revenue 
system.  He  had  gone  so  far  as  to  contemplate  the  introduction 
of  the  progressive  scale  into  the  tax  on  house  rentals;  but  before 
the  bill  could  be  discussed  and  before  his  wider  plans  for  other 
changes  were  completed,  he  was  compelled  to  resign  for  reasons 
entirely  disconnected  with  these  financial  problems. 

The  reform  of  the  Dutch  tax  system  was  thus  only  partial; 
but  enough  was  accompUshed  to  entitle  Pierson  to  a  high 
place  in  the  ranks  of  fiscal  reformers.  The  exaggerated  burdens 
on  the  lower  classes  were  lessened,  the  tax  on  incomes  was 
generalized  and  equalized ,  and  the  principles  of  progression 
and  of  differentiation  were  introduced;  in  short,  a  notable  step 
was  taken  toward  the  realization  of  the  doctrine  of  faculty. 
Although  open  to  criticism  in  some  of  its  details,  the  change 
represents  undeniable  progress. 

IV.  Prussia 

While  England,  Holland  and  New  Zealand  were  occupied 
chiefly  with  the  reform  of  general  state  taxation,  Prussia  was 
fortunate  enough  to  take  one  step  further  and  to  address  her- 
self to  the  solution  of  a  problem  which  the  reformers  in  other 
countries  declare  to  be  their  next  point  of  attack.  The  reform 
of  local  taxation,  and  the  establishment  of  proper  relations 
between  the  general  and  the  local  revenue  systems  constitute 
problems  which  to-day  confront  all  countries;  for  no  really 
harmonious  system  of  taxation  can  ever  be  attained  until  the 
claims  of  conflicting  or  overiapping  jurisdictions  are  satis- 
factorily adjusted.  In  federal  states  like  Germany,  Switzeriand 
and  the  United  States  the  matter  is  complicated  by  the  demands 
of  the  central  government;  but  in  all  countries  the  fiscal  rela- 
tions between  the  state  and  the  local  spheres  of  government 
are  more  or  less  confused  and  unsatisfactory.  The  immense 
increase  in  local  needs  has  everywhere  so  pushed  this  problem 


IP' 


474 


ESSAYS  m  TAXATION 


RECENT  REFORMS  IN  TAXATION 


475 


■ 

I 


into  the  foreground  that  the  solution  inaugurated  in  Prussia  is 
a  matter  of  far  more  than  mere  local  importance. 

In  order  to  understand  the  situation,  it  is  necessary  to  dwell 
for  a  moment  on  the  Prussian  tax  system.    In  Prussia,  as  well 
as  m  the  other  German  states  and  in  most  of  the  remaining 
countries  of  the  continent,  the  state  system  had  been  based  on 
the  principle  of  taxing  product.    The  old  general  property  tax 
long  since  disappeared  and  was  replaced  by  a  system  which 
attempted  to  reach  the  constituent  elements  of  produce     In- 
stead of  taxing  a  man  personally  on  his  property,  the  plan  was 
to  tax  the  various  sources  of  revenue  themselves.    The  thing 
and  not  the  person,  was  primarily  responsible;  and  therefore 
the  new  taxes  received  the  name  of  real  taxes,  as  compared  with 
the  former  personal  taxes.^    These  taxes  on  product  (Ertraa- 
steuern)  as  they  are  called  in  Prussia,  or  real  taxes  {impots  reels) 
as  they  are  called  m  France,  everywhere  included  taxes  on  the 
product  of  land,  of  buildings  and  of  business.    In  addition  to 
these    one  or  two  other  taxes  were   sometimes  utilized    to 
round  out  the  system.    What  was  omitted  in  the  three  taxes 
above  was  the  product  of  money  lent  at  interest  and  the  produce 
of  labor     Some  of  the  German  states  therefore,  desiring  to  be 
logical  at  all  costs,  added  a  tax  on  interest  (Kapitalrentenstemr) 
and  a  tax  on  wages  (Lohn-  und  BesoUungsteiier) .     In  most 
cases  however,  the  wages  tax  was  omitted  because  the  laborer 
already  bore  more  than  his  share,  and  the  tax  on  interest  was 
replaced  by  a  more  general  tax  which  endeavored  in  some  way 
to  reach  the  individual  condition  of  the  tajcpayer.     Thus  in 
France  shortly  after  the  Revolution  the  "personal  and  mova- 
bles   tax  was  introduced,  which  tried  to  reach  individual  abiUtv 
through  expenditures;  ^  while  in  Prussia  the  three  taxes  men- 
tioned above  were  supplemented  by  a  class  tax,  which  was  to 
reach  the  taxpayer  m  some  rough  proportion  to  his  revenue 
In  the  course  of  time,  however,  it  came  to  be  recognized 
that  product  was  for  many  reasons  too  rough  a  test  of  faculty 
and  the  tendency,  recent  evidence  of  which  has  been  seen  above 
» This  nomenclature  must,  of  course,  not  be  confused  with  that  sometime^ 

^sxrrn  t^x"^^  -^ """  ™  -'^'^-  -"  -  ""^ 

J  ""  rT.?!  p"  'T'  "'^f'^  '""^r  «1<I'«''"'J  ^>  "the  door  and  window 
tax.      But  aU  French  writers  confess  that  it  is  indefensible  and  it,  Uke  the 

Sclr^  •     """  "^^"^  ^  '^"  "''^•'  '^^  ^•^'"^  t*^  was  to! 


was  to  replace  product  by  income.  Thus,  the  class  tax  in 
Prussia  was  somewhat  modified  as  early  as  1821  in  the  direction 
of  an  income  tax,  until  after  successive  changes  in  1851  and  1873 
it  became  a  complete  general  income  tax  in  1891.  The  land, 
house  and  business  taxes  were  nevertheless  retained.  This 
mixture  of  taxes  on  product  and  on  income  was  recognized  as 
illogical,  but  was  defended  on  the  ground  that  the  government 
could  not  yet  dispense  with  the  former.  At  the  same  time  the 
business  tax  was  radically  reformed,  so  as  to  afford  a  far  more 
accurate  criterion  of  real  business  income.  Finally,  the  same 
year,  1891,  saw  the  recasting  of  the  old  probate  duties  into  an 
inheritance  tax,  which  especially  with  the  amendments  of  1895 
became  a  modern  collateral  inheritance  tax  with  rates  graduated 
from  one  to  eight  per  cent  according  to  relationship.  The  reform 
of  the  taxes  on  income,  business  and  inheritances,  while  exceed- 
ingly important,  will  be  passed  over  here,  partly  because  the 
laws  were  enacted  several  years  earlier  and  have  been  treated  as 
separate  measures  elsewhere,^  and  partly  because  the  principles 
involved  are  about  the  same  as  those  alluded  to  in  the  reform  of 
Dutch  taxation.  Above  all,  the  real  significance  of  the  recent 
Prussian  legislation  lies  in  a  different  domain. 

The  Prussian  legislator,  in  desiring  to  reform  the  whole  tax 
system,  was  confronted  by  several  tasks.  In  the  first  place, 
in  order  to  realize  the  principle  of  the  taxation  of  persons  rather 
than  of  product,  it  was  necessary  to  supplement  the  income  tax 
by  some  other,  so  that  their  joint  yield  would  render  it  possible 
to  dispense  with  the  taxes  on  product;  secondly,  it  was  nec- 
essary, as  in  Holland  and  elsewhere,  to  provide  for  a  differen- 
tiation as  well  as  for  a  progression  of  taxation;  thirdly,  since 
local  needs  differ  from  general  needs,  a  distinction  had  to  be 
drawn  between  the  sources  of  local  and  general  revenue.  Sep- 
arate taxes  thus  had  to  be  assigned  to  each  sphere  of  govern- 
ment activity. 

Let  us  see  how  these  several  tasks  were  accomplished.    Just 

as  the  English  reforms  were  largely  the  work  of  Harcourt, 

»  For  the  income  tax  cf.  Seligman,  The  Income  Tax,  1911,  pp.  250-258. 
For  the  business  tax,  cf.  J.  A.  Hill,  "The  Prussian  Business  Tax,"  Quar- 
terly Journal  of  Economics,  viii.,  p.  77.  The  most  elaborate  treatment  of 
the  subject  is  to  be  found  in  two  articles  by  Professor  A.  Wagner,  "Die 
Reform  der  direkten  Staatsbesteuerung  in  Preussen  im  Jahre  1891,"  Finanz- 
Archiv,  viii.,  pp.  551-810,  and  xi.,  pp.  1-76.  Cf.  the  articles  by  Jastrow, 
"Studien  zur  preussischen  Einkommensteucr,"  in  Jahrbucher  fur  National- 
okonomie  und  Statistik,  Iviii.,  pp.  634,  839,  and  lix.,  p.  75. 


\\i 


:    'i 


i 


476 


ESSAYS  nV  TAXATION 


and  as  the  Dutch  reforms  were  due  to  Pierson,  so  in  Prussia  the 
chief  credit  must  be  given  to  the  finance  minister,  Dr.  Miquel 
although  he  was  here  simply  walking  in  the  path  cleared  for  him 
by  the  foremost  economists.^ 

When  the  income-tax  law  of  1891  was  discussed,  the  hope 
was  expressed  that  its  yield  might  be  sufficient  to  enable  the 
state  to  dispense  with  the  taxes  on  product;  for  notwithstand- 
mg  the  labored  arguments  of  some  writers,  the  simultaneous 
existence  of  income  and  of  produce  taxes  was  recognized  as 
illogical.  Even  though  the  principle  of  progression  was  applied 
to  the  income  tax,  it  was  thought  that  the  yield  would  fall  far 
short  of  the  desired  amount.  Since  an  increase  of  the  rate  above 
the  four  per  cent  fixed  in  the  law  as  a  maximum  was  impossible, 
an  earnest  effort  was  made  to  expand  the  existing  collateral 
inheritance  tax  into  a  direct  inheritance  tax.  This  plan,  however, 
came  to  naught;  and  nothing  remained,  therefore,  but  to  con- 
tinue the  old  taxes  on  product. 

The  agitation,  nevertheless,  went  on  and  was  helped  along  by 
what  was  conceded  to  be  a  defect  in  the  income  tax.  Although 
the  principle  of  progression  had  been  introduced,  no  provision 
had  been  made  for  a  differentiation  of  the  rate.  Income  from 
labor  was  taxed  at  the  same  rate  as  income  from  property. 
Dr.  Miquel  therefore  proposed  to  introduce  a  supplementary 
property  tax,  hoping  in  this  way  to  achieve  both  of  the  desired 
results.  Since  this  property  tax,  like  all  nominal  property 
taxes,  would  really  be  paid  out  of  the  income  of  the  property,  it 
was  thought  that  it  would  act  as  an  additional  tax  on  income  in 
so  far  as  the  income  was  derived  from  property.  Incomes  from 
labor  would  pay  only  the  income  tax;  incomes  from  property 
would  pay  both  income  tax  and  property  tax.    Thus  a  practical 

»  *  J^f  ^^^^'^e  German  articles  on  the  topics  are  as  follows:  J.  Jastrow, 
Die  Vermogensteuer  und  ihre  Einf  Ugung  in  das  preussische  Steuersystem  " 
Jahrbucher  fur  Nationaldkonomie  und  Statistik,  lix.,  p.  161;  R.  Friedberg 
Zur  Reform  der  Gemeindebestcuerung  in  Preussen,"  ibid.,  pp.  321-341  •  f' 
Adickes,  "  Uebor  die  weitere  Entwickelung  des  Gemeinde-Steuerwesens 
auf  Urund  des  preussischen  Kommunalabgabengesetzes  vom  14  Juli,  1893  " 
m  Zeitschrift  fur  die  gesammte  Staatswissenschaft,  li.,  pp.  410^52  .583-658 
The  best  treatment  of  the  whole  topic,  including  a  history  of  tlie  earlier 
system,  a  description  of  the  government  bills,  and  the  discussions  in  Parlia- 
ment as  well  as  the  text  of  thi^  law  itself  with  commentaries,  is  to  be  found 
m  h.  Adickes,  Das  Kotnmunnlnbgahengesetz  vom  1 4  Juli  1893,  fur  den  prak- 
Hschen  Gebrauch  mit  einer  qeschichtlichen  EinleUung  und' Erlauterunaen 
versehen,  Berlin,  1894,  8vo,  396  pp. 


RECENT  REFORMS  IN  TAXATION 


477 


differentiation  would  be  introduced  This  supplementary  tax, 
moreover,  would  be  levied  on  the  property  owner  and  would  be 
a  substantial  addition  to  the  personal  taxes,  rendering  it  pos- 
sible for  the  state  to  dispense  with  the  taxes  on  product. 

This  reasoning  prevailed,  and  resulted  in  the  enactment  of 
the  law  of  1893,  which  was,  however,  not  to  go  into  force  until 
April  1,  1895.^  The  law  provided  for  a  "supplementary  tax" 
of  five-tenths,  or  one-half  of  one,  per  mill  on  all  property. 
Exemption  was  granted  to  all  property  of  less  than  6,000  marks; 
to  all  persons  whose  income  does  not  exceed  900  marks,  pro- 
vided their  property  does  not  exceed  20,000  marks;  and  to 
women  wage  earners  and  minor  orphans  whose  income  does  not 
exceed  1,200  marks,  and  whose  property  does  not  exceed  20,000 
marks. 

What  is  more  important  is  the  change  that  was  now  made 
possible  in  the  local  revenue  system,  and  in  its  relation  to  the 
state  system. 

The  German  local  revenue  system  was  exceedingly  unsat- 
isfactory. In  most  of  the  towns  indirect  taxes  on  consumption 
played  a  considerable  role;  in  some  places  indirect  taxes  on 
transfers  jdelded  a  substantial  sum.  But  so  far  as  direct  taxes 
are  concerned,  we  find  everywhere  that  the  towns  simply  added 
a  percentage  to  the  state  taxes,  which  in  most  cases  would  be 
taxes  on  product,  like  the  land,  house,  business,  interest,  and 
wages  taxes.  Where  state  income  taxes  existed,  a  local  percent- 
age was  also  added,  so  that  the  amount  of  income  taxes  alone 
paid  by  a  townsman  often  exceeded  eight  or  ten  per  cent.  Only 
in  four  towns,  among  them  Berlin  and  Frankfort,  were  there  any 
taxes  on  rentals.  In  Prussia  the  matter  was  still  further  com- 
plicated by  the  so-called  Lex  Huene  of  1885,  which  provided 
that  a  certain  share  of  the  imperial  duties  on  agricultural 
products  should  go  to  the  local  divisions  instead  of  to  the  state. 

*  Erganzungssteuergesetz  von  14  Juli,  1893.  The  tax  is  arranged  in 
classes  so  that  the  one-half  mill  rate  applies  only  to  the  lowest  figures  in 
each  class. 

Property.  Tax. 

Thus  6,000  to  8,000  marks  pay  3  marks. 
10,000  to  12,000  "  "5 
20,000  to  22,000  "  "  10 
40,000  to  44,000  "  "  20 
60,000  to  70,000  "  "  30 
From  70,000  to  200,000  m.  the  tax  increases  5  marks  for  each  10,000  m. 
Above  200,000  m.  the  tax  increases  10  marks  for  each  20,000  m. 


n 


II 


It 


It 


I 


478 


ESSAYS  IN  TAXATION 


w 


;1 


I! 


ii 


The  shortcomings  of  this  whole  system  were  so  obvious  and 
became  so  intolerable  that  Prussia  boldly  attempted  to  abolish 
them  at  one  stroke.  The  fundamental  principles  that  emerged 
in  the  discussion  of  the  subject  during  the  session  1892-93  may 
be  summarized  as  follows: 

The  relation  of  the  individual  to  the  local  community  is 
somewhat  different  from  his  relation  to  the  state  at  large. 
The  town  is  to  a  certain  extent  an  association  of  business  in- 
terests.    While  therefore  the  obligation  of  the  citizen  to  con- 
tribute to  the  general  burdens  should  be  regulated  by  the 
principle  of  faculty  or  ability,  it  is  eminently  proper  that  in  the 
case  of  the  local  l)odies  more  attention  should  be  paid  to  the 
principle  of  benefits.    In  the  local  divisions,  an  extension  should 
be  given  to  the  principle  underlying  what  in  the  United  States 
are  called  special  assessments  and  fees.    An  argument  of  some- 
what the  same  nature — a  discussion  of  its  precise  terms  would 
carry  us  too  far  astray— led  to  the  demand  for  the  real  estate 
tax  as  one  of  the  chief  sources  of  local  revenue.    A  tax  on  real 
estate  is  a  real  tax,  a  tax  on  product;  it  is  not  a  personal  tax. 
Moreover,  the  real  estate  tax  is  an  especially  good  local  tax, 
partly  because  the  benefits  of  local  expenditure  accrue  primarily 
to  real  estate  and  tlius  increase  the  faculty  of  the  owner;  partly 
because  making  it  a  local  tax  would  at  once  remove  from  the 
public  arena  the  unseemly  disputes  about  inequality  of  rates 
and  about  equalization,  with  which  the  public  is  scarcely  less 
familiar  abroad  than  in  America. 

On  the  other  hand,  the  income  tax  is  unsuitable  for  a  local 
tax,  chiefly  because  amid  modern  complications  income  can- 
not well  be  localized.  The  sphere  of  local  indirect  taxes,  also, 
should  be  restricted,  because  local  taxes  on  consumption  are 
apt  to  press  with  undue  severity  on  the  poorer  classes.  But 
since  other  classes,  as  well  as  real  estate  owners,  share  the 
duty  of  contributing  to  local  burdens,  the  real  estate  tax  should 
be  supplemented  by  a  business  tax,  in  the  shape  of  a  real  tax, 
rather  than  of  a  personal  tax.  Thus  the  conclusion  is  easily 
reached:  personal  taxes  in  the  shape  of  an  income  tax  and  of  a 
supplementary  property  tax  for  the  state  government;  real 
taxes,  like  the  land  tax,  the  house  tax  and  the  business  taxes 
for  the  local  bodies.  If  we  join  to  this  a  diminution  in  the 
local  indirect  taxes,  and  an  increase  of  special  assessments 
and  of  fees,  we  shall  have  a  system  which  is  logically  defensible 
and  practically  workable. 


RECENT  REFORMS  IN  TAXATION 


479 


In  accordance  with  these  ideas  were  passed  the  three  great 
laws  of  July  14,  1893.  The  first  law,  which  has  already  been 
mentioned,  provided  for  the  supplementary  property  tax. 
The  second  law  ^  abolished  as  sources  of  state  revenue  the  real 
taxes — that  is,  the  land  tax,  the  house  tax,  the  business  tax 
and  the  old  tax  on  mines,  the  first  three  being  handed  over 
to  the  communes  or  local  bodies,  and  some  minor  changes 
being  made  in  the  business  tax  with  the  same  end  in  view. 
This  law,  like  the  others,  was  not  to  go  into  effect  until 
April  1,  1895;  partly  in  order  to  leave  time  for  the  arrangement 
of  the  local  system,  partly  in  order  to  enable  the  state  income 
tax  to  be  perfected  so  that  its  increased  yield  would  more  than 
compensate  for  the  loss  of  the  taxes  on  product.  Finally, 
the  third  law  ^  regulated  the  sources  of  local  revenue. 

According  to  this  law,  the  local  bodies  are  not  only  per- 
mitted, but  directed,  to  impose  fees  and  special  assessments 
in  cases  where  the  local  action  results  in  a  special  measurable 
benefit  to  the  individual;  and  the  extent  of  these  charges  is 
definitely  regulated.  Indirect  taxes  are  not  forbidden,  but  it 
is  provided  that  no  new  or  increased  taxes  may  be  imposed 
on  meat,  corn  or  bread,  potatoes  or  the  articles  of  common 
consumption.  Direct  taxes  may  be  imposed  on  real  estate 
and  on  business.  In  special  cases  a  local  income  tax  may  be 
levied  as  an  addition  to  the  state  income  tax;  but  a  maximum 
is  fixed  and  permission  is  given  to  substitute  in  its  stead  taxes 
on  expenditure,  which  must  be  so  arranged  as  not  to  impose 
on  the  poor  a  heavier  burden  than  on  the  rich.  In  no  case 
may  a  local  general  property  tax  be  imposed,  nor  may  the 
existing  taxes  on  rentals  be  increased.  The  statute  does  not 
affect  in  any  way  the  rights  of  the  local  bodies  to  revenue 
from  industrial  enterprises  or  municipal  monopolies,  with 
the  one  exception  that  the  charges  must  be  sufficient  to  pro- 
vide a  revenue  at  least  equal  to  the  interest  on  the  outlay  and 
a  yearly  addition  to  the  sinking  fund.  The  law  closes  with 
some  minor  provisions  appUcable  to  county  or  provincial 
revenues. 

Into  the  details  of  these  laws  it  is  manifestly  impossible  to 

1  Gesetz  wegen  Aufhebung  direkter  Staatssteuern.  This  is  printed  in 
Finanz-Archiv,  x.,  pp.  795-801. 

2  Preussisches  Kommunalabgabengesetz.  This  has  been  published  in 
Finanz-Archiv,  x.,  pp.  318-341.  The  best  edition  is  the  one  of  Adickes, 
mentioned  above,  with  commentary  and  notes. 


480 


ESSAYS  IN  TAXATION 


\i< 


I 


Hi 


m 


go.    Were  there  space,  it  would  be  fruitful  to  call  attention 
to  some  errors  in  the  general  theory  and  to  some  mistakes 
in  the  practical  arrangements.     Thus  the  aboUtion,  rather 
than  the  improvement,  of  the  rentals  tax;  the  retention  of 
the  indirect  taxes;  the  failure  to  provide  for  a  state  inheritance 
tax;  and  the  inadequate  working  out  of  the  principles  of  the 
corporation  tax  constitute  undeniable  blemishes.     Above  all 
there  was  an  unfortunate  limitation  upon  the  increase  of  the 
"real"  taxes.    It  was  enacted  that  for  every  increase  in  the 
rate  of  the  income  tax  on  the  part  of  the  localities,  there  must 
be  at  least  a  similar  increase  (but  at  most  not  more  than  one- 
half  as  much  again)  in  the  rate  of  the  real  taxes  or  taxes  on 
product— the  taxes  on  land,  buildings  and  business.     If  the 
taxes  on  product,  however,  are  augmented  so  as  to  reach  one 
hundred  and  fifty  per  cent  of  the  old  rates,  further  increases 
are  permitted  at  the  rate  of  two  per  cent  in  the  income  tax 
for  each  one  per  cent  in  the  taxes  on  product  until  the  latter 
reach  two  hundred  per  cent  of  the  old  rate.     Exceptions  to 
this  rule  are  permitted  only  by  governmental  sanction.     The 
result  has  been  that  it  has  become  impossible  to  raise  the  real 
estate  tax  in  the  towns  without  increasing  the  rate  of  the  in- 
come tax  to  inordinate  heights.    As  a  consequence  the  German 
cities,  which  everywhere  raise  far  less  revenue  from  real  estate 
than  do  the  American    cities,  have  sometimes  been  seriously 
embarrassed  in  securing  adequate  revenue.   This  is  undoubtedly 
the  chief  defect  in  the  law. 

All  these  defects,  however,  sink  into  insignificance  when  com- 
pared  with  the  one  great  boon— the  acceptance,  even  in  an 
imperfect  way,  of  the  principle  of  the  segregation  of  source 
as  between  local  and  state  revenues.  For  this  all  reformers 
have  been  contending  the  world  over— in  France  as  in  Austra- 
lia, in  Italy  as  in  America.  To  have  successfully  accomplished 
this  result  and  to  have  brought  it  into  harmony  with  the  doc- 
trine of  faculty,  is  an  achievement  of  suflScient  importance  to 
entitle  Dr.  Miquel  to  a  high  place  in  the  ranks  of  fiscal  reformers. 
The  year  1895  will  mark  an  epoch  not  only  in  Prussian,  but 
also  in  international  finance. 

After  this  survey  it  is  needless  to  point  out  the  lessons  appli- 
cable to  the  United  States.  The  economic  conditions  of  the 
civilized  world  are  everywhere  fast  becoming  the  same;  and 
upon  the  changes  in- economic  conditions  depend  the  changes 


RECENT  REFORMS  IN  TAXATION 


481 


in  financial  systems.  In  old  Europe  as  well  as  in  young  Aus- 
tralia the  same  tendency  is  unmistakable — the  trend  to  greater 
justice  in  taxation.  When  four  widely  distant  countries  re- 
form their  systems  almost  simultaneously,  and  upon  the  same 
general  fines,  the  inference  is  irresistible  that  the  causes  of  the 
movement  are  of  far  more  than  mere  local  significance.  To 
shut  our  eyes  to  this  world-wide  movement  would  be  supreme 
folly;  to  profit  by  its  lessons  and  to  bring  our  own  system  into 
line  with  the  demands  of  modem  science  and  of  modem  con- 
ditions will  be  no  less  wise  than  it  is  inevitable. 


I 


II 


CHAPTER  XVII 


u 


I      *i 


r 


IP| 


RECENT  REFORMS  IN  TAXATION.  II.  THE  REFORMS 

OF  1909-1910 

Nothing,  perhaps,  in  the  history  of  taxation  is  more  striking 
than  the  appearance  of  successive  waves  of  reform.  In  the 
preceding  chapter  we  have  studied  the  movements  which 
culminated  at  almost  the  same  time  in  various  countries, 
some  of  them  widely  separated  from  each  other.  A  decade 
and  a  half  later  we  find  another  reform  movement  which  swept 
over  some  of  the  identical  countries  treated  of  above,  and 
which,  although  in  some  respects  proceeding  still  further  on 
the  old  lines,  yet  in  other  ways  struck  out  in  a  new  direction. 
The  years  1909-1910  are  marked  by  significant  changes  in  the 
fiscal  systems  of  England,  Germany  and  Australia,  and  in  the 
same  year  came  the  adoption,  after  several  decades'  struggle, 
of  the  income  tax  bill  by  the  lower  house  in  France.^ 

I.  Great  Britain 

The  first  place  in  the  history  of  the  reform  movement  is  oc- 
cupied by  Great  Britain  in  the  famous  Lloyd  George  budget. 
This,  while  making  in  some  respects  a  new  departure  in  fiscal 
policy,  is  nevertheless  to  be  considered  in  the  main  as  a  logical 
development  of  a  movement  initiated  some  time  ago. 

The  agitation  for  augmented  revenues  in  Great  Britain  has 
been  precipitated,  as  is  well  known,  by  the  great  increase  in 
expenditures,  due  partly  to  the  prodigious  addition  to  the  naval 
estimates  and  partly  to  the  new  social  legislation  on  old-age 
pensions  and  national  insurance.  Moreover,  it  is  everywhere 
conceded  that  England  is  on  the  brink  of  still  greater  expendi- 
tures. For  while  it  may  indeed  be  expected  that  the  mad  race 
for  increased  naval  armaments  will  before  long  reach  its  term, 
it  is  not  unlikely  that  the  insurance  schemes  constitute  only  the 

*  For  a  study  of  this  subject  which  is  not  treated  here  because  the  reform 
has  not  yet  been  accomplished,  see  Seligman,  The  Income  Tax,  New  York, 
1911,  part  I.,  book  2,  chap.  2.    The  reform  was  finally  accomplished  in  191?! 

482    . 


RECENT  REFORMS  IN  TAXATION 


483 


first  of  a  series  that  will  call  for  increasingly  vast  outlays.  Even 
if  England  should  adopt  the  policy  of  so-called  tariff  reform, 
it  is  improbable  that  the  whole  or  even  the  greater  part  of  its 
increased  expenditure  will  be  met  by  import  duties. 

Until  the  repeal  of  the  corn  laws,  the  national  revenues  of 
England,  like  those  of  almost  all  other  great  nations,  were  de- 
rived almost  exclusively  from  indirect  taxes.  Beginning  shortly 
before  the  middle  of  the  century,  the  tendency  in  England,  as 
elsewhere,  has  been  toward  reliance,  in  an  ever  greater  degree, 
upon  direct  taxes.  First  the  income  tax  was  introduced,  al- 
though timidly  and  only  as  a  temporary  measure.  Gradually 
its  administration  was  improved  and  its  yield  increased,  until 
by  the  end  of  the  seventies  it  was  recognized  as  a  permanent 
part  of  the  tax  system.  In  the  nineties  the  death  duties  or  in- 
heritance taxes  were  remodelled,  and  have  since  been  playing 
an  increasingly  important  role  in  the  budget.  And  now,  finally, 
the  various  forms  of  land  revenue  were  to  be  added  to  the  list 
of  direct  taxes. 

It  would  be  a  mistake,  however,  to  assume  that  an  over- 
emphasis was  put  upon  direct  taxes.  On  the  contrary,  a  con- 
siderable part  of  the  additional  revenue  in  the  new  budget  was 
to  come  from  indirect  taxes.  In  fact,  so  far  as  its  fiscal  policy 
is  concerned,  the  Liberal  party  cannot  be  said  to  be  opposed 
to  the  use  of  indirect  taxes;  it  is  committed  rather  to  the  prin- 
ciple that,  in  order  to  meet  the  growing  needs  of  government, 
recourse  must  be  had  to  direct  as  well  as  to  indirect  taxes. 
The  English  policy  is  to  hold  the  balance  even,  not,  as  is  often 
hastily  assumed,  to  dispense  with  indirect  taxes.  Thus,  if  we 
take  the  period  from  1895  to  1908— that  is,  from  Harcourt's 
budget  reform  up  to  the  year  preceding  the  Lloyd  George 
budget— we  find  that  of  the  increase  in  revenues  of  44  million 
pounds  20  million  pounds  came  from  indirect  taxes  and  24  million 
pounds  from  direct  (as  appears  from  the  table  on  the  next  page). 
Moreover,  when  attention  is  directed  to  the  reduction  of  indirect 
taxes  in  the  budgets  of  1906  and  1908,  it  is  sometimes  forgotten 
that  equal  reductions  were  made  in  the  direct  taxes. ^    From 

>  In  an  article  by  J.  Watson  Grice  in  the  American  Economic  Review,  vol. 
i.  (1911),  p.  490  et  seq.,  an  incorrect  impression  is  left  on  the  reader's  mind 
as  to  this  point.  All  the  remissions  of  indirect  taxes  mentioned  by  Mr. 
Grice,  Uke  those  on  coal,  sugar  and  tea,  were  simply  remissions  of  new  or 
additional  taxes,  imposed  during  the  war  period,  and  were  more  than  coun- 
terbalanced by  the  reduction  of  the  rate  of  the  income  tax. 


i 


ai 


i 


r'l 


I     i 


484 


ESSAYS  IN   TAXATION 


1903,  which  was  the  highwater  mark  of  the  new  budgets,  to  1908, 
the  remissions  of  taxation  were  nearly  the  same  in  each  of  the 
two  classes. 

Revenue  (in  millions  of  pounds) 


TEAR 

INDIRECT  TAXES 

DIRECT  TAXES 

CUSTOMS 

EXCISES 

STAMPS 

TOTAL 

INCOME 
TAXES 

ESTATE 
DUTIES 

TOTAL 

1895  .... 

1903  ...  . 
1908  .... 

20 
35 
32 

30 
37 
36 

6 

8 
8 

56 
80 
76 

16 
39 
32 

11 

18 
19 

27 

57 
51 

It  was  quite  natural,  therefore,  that  when,  in  1909,  Lloyd 
George  found  a  little  over  14  millions  needed  to  carry  out  his 
program,  he  decided  that  somewhat  more  than  one-half  of  the 
deficit  should  be  raised  from  indirect  taxes:  from  increased 
customs  duties  and  excises  on  liquors  and  tobacco,  together 
with  additional  stamp  duties,  especially  on  securities,  a  gradu- 
ated tax  on  motor  cars  and  a  new  tax  on  petrol.  To  be  precise, 
the  additional  indirect  taxes  were  to  yield  £7,350,000  as  against 
£6,850,000  from  additional  direct  taxes.^ 


^  The  items  are  as  follows: 
Liquor  licenses  .      .  £2,600,000 

Tobacco 1,900,000 

Spirits 1,600,000 

Stamps 650,000 

Petrol 340,000 

Motor-car  licenses    .     .       260,000 


Income  tax  .  . 
Estate  duties  . 
Land  value  duties 


.£3,500,000 
.  2,850,000 
.       500,000 


£7,350,000 

The  chief  alterations  in  the  indirect  taxes  were  as  follows: 
Customs  duties: 

Spirits:      old  duty,  lis.  4d.  per  gal. 

additional  duty,  33. 9d.    "     " 

Beer:         old  duty,         *  £l-12s.          "   bbl. 

additional  duty.  Is.          "     " 

Tobacco:  old  duty,  Ss.         "   lb. 

additional  duty,  8d.   ' 


it 


increased  to 

II 

it 
(( 
tt 
u 


£6,850,000 


18s.  Id. 
5s.  Id. 
£l-17s.  6d. 
Is.  2d. 
4s.  id 
U. 


RECENT  REFORMS  IN  TAXATION 


485 


Incidentally  it  may  be  remarked  that  the  law  of  1909  re- 
pealed the  old  prohibition  against  cultivating  tobacco  in  Great 
Britain  (the  repeal  had  already  been  applied  in  Ireland  in 
1908),  which  had  been  introduced  over  two  and  one-half  cen- 
turies ago  in  order  to  foster  the  growth  ol  tobacco  in  the  American 
colonies  and  to  secure  the  tobacco  revenue  entirely  from  customs. 
Henceforth  the  tobacco  revenue  in  Great  Britain  is  to  come  not 
only  from  customs  duties  but  also  from  an  internal  license  of 
five  shillings  and  the  excise. 

Bearing  in  mind,  then,  the  important  part  which  the  increase 
of  indirect  taxes  plays  in  the  new  scheme,  it  remains  none  the 
less  true  that  the  chief  interest  of  the  budget  lies  in  the  direct 
taxes,  that  is,  the  income  tax,  the  inheritance  tax  and  the  new 
land  taxes. 

First,  as  to  the  income  tax.  There  are,  as  is  well  known, 
two  different  kinds  of  income  taxation.  The  one  is  the  Prussian 
system  of  the  so-called  ''lump-sum"  income  tax,  where  a  man  is 
compelled  to  make  a  return  of  his  entire  income.  The  other 
is  the  stoppage-at-source  system,  where  the  income  is  classified 
into  a  number  of  categories,  and  an  attempt  is  made  to  have  the 
tax  paid,  not  by  the  person  who  receives  the  income,  but  by  the 
person  who  pays  or  advances  the  income  to  the  recipient.  This 
is  the  system  which  the  English  have  adopted,  and  which  they 


lis.        per  gal.    increased  to 
3s.  Qd.  per  lb.  up       to 


Excise: 

Spirits:      old  duty, 
Tobacco:  new  duty. 
Motor       new  graduated 
cars:  duty,  £2-  2s. 

for  over  60  h.  p. 
Petrol:       new  duty,  dd.  per  gal. 


14s.  9d. 
is.  Sd. 


for  Q}/2  h.  p. 


(< 


(t 


£42 


Liquor  licenses: 

Wholesale  dealers  in  spirits  :£10-10s.  increased  to    £15-15s. 

Wholesale  dealers  in  beer:  £  3-  6s.  "        "     £10-10s. 

Retail  dealers:  duties  increased  according  to  a  percentage  of  the  annual 
value  of  the  licensed  premises. 

Stamp  duties: 

The  duties  on  conveyances  and  sales,  on  leases  (except  the  penny  duty) 
and  on  marketable  securities  were  doubled.  On  contracts  the  old  rates  of 
Id.  and  Is.  were  increased  to  6c?.,  rising  to  £1  on  contracts  of  over  £20,000. 
The  best  account  of  the  new  excises,  stamps  and  liquor  licenses  will  be 
found  in  J.  Wylie,  Liquor  License  Duties,  Death  Duties,  Income  Duties, 
Stamps,  Customs  and  Excises,  under  Parts  II.  to  VIII.  of  the  Finance  {1909- 
10)  Act,  with  explanatory  Notes  and  References,  Rules  and  Regulations, 
etc.  (London,  1910). 


t  - 


486 


ESSAYS  IN   TAXATION 


' 


1 


J 


consider  far  superior  to  the  Prussian.  Under  it  the  total  amount 
of  a  man's  income  is  not  divulged,  except  in  the  case  of  in- 
comes under  £700,  where  certain  abatements  are  permitted. 
But  the  English  system,  largely  because  of  these  arrangements, 
has  always  involved,  at  least  on  all  incomes  over  the  normal 
amount  of  £700,  a  simple  proportional  tax  and,  until  1907,  an 
undifferentiated  tax  as  well. 

The  interesting  feature  of  the  new  provisions  is  that  England 
is  henceforth  to  enforce  lx)th  the  differentiation  and  the  gradua- 
tion of  the  income  tax.  In  other  words,  not  only  is  a  distinction 
made  whereby  unearned  incomes  are  taxed  at  a  higher  rate 
than  earned  incomes,^  but  the  beginnings  of  a  real  progressive 
taxation  are  introduced  by  the  adoption  of  the  so-called  super- 
tax. That  is  to  say,  whenever  the  total  income  exceeds  £5,000, 
an  additional  duty  of  Qd.  in  the  pound  (over  and  above  the 
normal  rate  of  Is.  2d.)  is  charged  for  every  pound  of  the  amount 
by  which  the  total  income  exceeds  £3,000.  Moreover,  on  the 
smaller  incomes,  in  addition  to  the  al)atements  that  were  al- 
ready in  force,  it  is  provided  that  in  the  case  of  all  incomes 
under  £500  a  reduction  of  £10  in  the  tax  shall  be  made  for  each 
child.  Thus  at  both  ends  of  the  scale  modifications  of  the  in- 
come tax  are  provided  which  look  to  a  greater  approximation 
to  the  principle  of  ability  to  pay. 

The  importance  of  the  change  lies  chiefly  in  the  application 
of  the  doctrine  of  progression.  In  order,  however,  to  make 
this  possible,  it  has  become  necessary  to  abandon,  so  far  as  the 
larger  incomes  are  concerned,  the  old  principle  of  the  stop- 
page-at-source  and  to  replace  it  by  that  of  the  lump-sum  tax. 
That  is  to  say,  the  proportional  part  of  the  income  tax  ^vill 
still  be  levied  as  formerly,  according  to  the  stoppage-at-source 
scheme,  but  the  super-tax  will  have  to  be  assessed  according  to 
the  lumivsum  principle.  Although  some  doubts  were  expressed 
as  to  the  administrative  practicability  of  the  new  plan,  it  has 
thus  far  worked  without  much  friction.  The  number  of  super- 
taxpayers  during  the  first  full  year  of  the  operation  of  the 
law  was  between  ten  and  eleven  thousand,  with  an  aggregate 

*  In  1907,  when  the  general  rate  of  the  income  tax  was  Is.,  earned  incomes 
up  to  £2,000  were  charged  only  9d.  The  Finance  Act  of  1909-10,  which 
fixed  the  normal  rate  at  Is.  2d.,  left  unearned  incomes  up  to  £2,000  at  9d. 
and  assessed  unearned  incomes  between  £2,000  and  £3,(XK)  at  Is.  For  full 
details  of  what  is  meant  by  earned  income  under  these  laws,  see  Seligman, 
The  Incotne  Tax  2d.  ed.  (1914),  pp.  202-205. 


RECENT  REFORMS  IN  TAXATION 


487 


income  of  almost  130  million  pounds  upon  which  the  super-tax 
was  about  two  and  one-half  millions.^  It  is  worthy  of  note  that 
the  income-tax  project  adopted  by  the  lower  house  in  France 
pursues  the  same  double  plan. 

While  the  progressive  feature  was  only  hesitatingly  intro- 
duced into  the  income  tax,  it  has  been  applied  to  the  inheritance 
tax  since  1894.  An  interesting  feature  of  the  new  budget  is  the 
great  expansion  in  the  scale  of  graduation.  A  decided  step  in 
this  direction  had  already  been  taken  in  1907,  when  the  rates 
of  the  duty  on  estates  over  £150,000  were  increased,  so  that 
estates  of  a  million  pounds  paid  ten  instead  of  seven  and  one- 
half  per  cent,  and  the  maximum  rate,  on  estates  over  three 
million  pounds,  was  raised  from  eight  to  fifteen  per  cent.^ 
According  to  the  new  scheme  the  estate  duty,  which  begins 
at  the  rate  of  one  per  cent  on  estates  from  £100  to  £500,  now 
runs  up,  in  a  steep  graduation,  until  it  reaches  ten  per  cent  on 
estates  between  £150,000  to  £200,000  and  fifteen  per  cent  on 
estates  over  £1,000,000.^  In  considering  these  figures  it  must 
be  remembered  that  in  addition  to  the  estate  duty,  which  ap- 
plies to  the  whole  of  the  estate,  there  are  also  the  legacy  and 
succession  duties,  which  apply  to  separate  shares  of  the  estate, 
and  which  correspond  to  what  are  called  in  America  collateral 
inheritance  taxes.  These,  which  are  graduated  according  to 
relationship,  run  up  to  ten  per  cent.     The  result  is  that  the 

^  Owing  to  the  contest  over  the  budget  the  returns  for  the  year  1909-10 
did  not  come  in  until  the  following  year.  For  details  see  the  Fifty-fourth 
Report  of  the  Commissioners  of  Inland  Revenue  (1911),  pp.  99,  100. 

*  For  the  exact  figures  of  the  law  of  1907  see  Seligman,  Progressive  Taxa- 
tion (2d  ed.,  1908),  p.  45. 

'  The  exact  scale  is  as  follows: 


On  estates  from 

£100 

to 

£500 

the  rate  is     1  i 

per  cent. 

11 

<( 

500 

to 

1,000 

"    2 

ff 

tt 

1,000 

to 

5,000 

"    3 

<i 

tt 

5,000 

to 

10,000 

'    4 

tt 

tt 

10,000 

to 

20,000 

"    5 

it 

tt 

20,000 

to 

40,000 

'    6 

i( 

tt 

40,000 

to 

70,000 

'    7 

n 

tt 

70,000 

to 

100,000 

'    8 

tt 

tt 

100,000 

to 

150,000 

'    9 

tt 

tt 

150,000 

to 

200,000 

'  10 

tt 

tt 

200,000 

to 

400,000 

'  11 

tt 

tt 

400,000 

to 

600,000 

'  12 

tt 

tt 

600,000 

to 

800,000 

'  13 

u 

tt 

800,000 

to 

1,000,000 

r.    14 

it 

over 

1,000,000 

"  15 

488 


ESSAYS  IN  TAXATION 


English  inheritance  tax  under  its  present  form  is  graduated 
up  to  the  point  of  twenty-five  per  cent — figures  which  are  as 
high  as  those  found  in  any  other  part  of  the  world  and  which, 
so  far  as  the  direct  inheritance  tax  is  concerned,  exceed  any- 
thing that  is  to  be  found  in  the  United  States. 

Important  as  were  these  changes  in  the  income  tax  and  the 
death  duties,  the  most  significant  feature  of  the  budget — and  the 
true  cause  of  the  resistance  by  the  House  of  Lords  which  led 
to  the  epoch-making  constitutional  changes  of  the  following 
year — ^was  the  introduction  of  the  new  land  taxes. 


1     I 


1  «: 


II.  The  British  Land  Taxes 

Since  the  gradual  breakdown  of  the  old  English  land  tax  and 
its  conversion  in  1798  into  a  redeemable  rent  charge,  land  in 
England  had  not  been  subject  to  any  special  taxation.  The 
local  rates  were  indeed  levied  on  real  estate,  and  the  profits  of 
land  were  subject  to  the  income  tax;  but,  both  in  the  local 
rates  and  in  the  income  tax,  land  was  taxed  only  when  it  yielded 
an  actual  revenue,  and  whenever  land  was  not  rented  or  did 
not  yield  an  actual  money  income  it  was  not  taxed  at  all.  In  a 
country  like  England,  where  there  are  so  many  large  estates 
utilized  for  purposes  of  pleasure  or  other  non-lucrative  ends, 
or  held  for  speculation,  this  had  become  a  source  of  great  em- 
barrassment. Moreover,  even  as  to  the  land  that  is  rented, 
the  English  system  differs  from  that  of  the  United  States  in 
two  important  respects. 

In  the  first  place,  in  the  United  States  land  in  the  outskirts 
of  the  towns  is  subject  to  special  assessments  for  local  improve- 
ments. When  the  value  of  the  land  is  enhanced  by  the  open- 
ing or  grading  of  streets,  a  portion  of  the  enhancement  of 
value  is  taken  by  the  government,  which  in  a  sense  creates  it. 
In  England,  with  rare  exceptions  in  recent  years,  this  practice 
is  unknown.  The  British  landowner  enjoys  the  increment  of 
value,  and  the  burden  of  the  expenditure  is  borne  by  the  gen- 
eral ratepayer. 

In  the  second  place,  land  in  the  United  States  is  taxable  at 
its  selling  value;  and,  if  the  land  rises  in  value  as  population 
increases,  the  landowner  must  still  bear  his  proportion  of  the 
local  burdens,  even  though  the  land  remains  vacant  or  is  used 
for  agricultural  purposes.  While  some  American  towns  are 
indeed  in  the  habit  of  assessing  vacant  lots  with  considerable 


RECENT  REFORMS  IN  TAXATION 


489 


tenderness,  others  pursue  a  different  practice,  and  in  every  case 
it  is  an  easy  matter  for  an  aroused  public  sentiment  to  make  the 
practice  conform  to  the  law,  and  thus  to  increase  the  burdens 
of  the  land  pari  passu  with  the  rise  of  land  values.  In  Great 
Britain,  on  the  other  hand,  lands  are  taxable  according  to 
rental  value.  If  they  are  vacant  they  are,  as  we  have  seen,  fre- 
quently not  taxed  at  all.  If  they  are  rented  for  agricultural 
purposes,  however,  their  rental  value  is  manifestly  far  lower 
than  would  be  the  case  if  the  land  were  used  for  buildings. 
Consequently,  even  if  they  are  subject  to  the  local  rates,  they 
pay  a  pitifully  small  amount  compared  to  their  real  ability  to 
pay;  and  the  growing  prosperity  of  the  town  results  only  in 
benefits  to  the  landowner  without  subjecting  him  to  any  corre- 
sponding burdens. 

Thus  from  every  point  of  view  the  owners  of  unimproved 
land  in  Great  Britain  constituted  a  favored  class.  They  were 
not  subject  to  special  assessments,  they  were  not  taxed  when  the 
land  was  unrented,  and  they  were  undertaxed  if  the  land  was 
rented.  In  all  these  respects  they  were  in  a  position  very  dif- 
ferent from  that  of  the  American  landowners.  The  situation 
in  Great  Britain  was  anomalous.  The  new  land  taxes  were 
designed  to  put  an  end  to  this  situation. 

As  far  back  as  1901  a  royal  commission  on  local  taxation  had 
suggested  a  local  tax  on  site  values;  and  in  1904  and  again  in 
1905  a  bill  to  this  effect  had  reached  a  third  reading  in  the 
House  of  Commons.  In  Scotland  the  movement  had  been 
even  more  decided.  As  soon  as  the  Liberal  party  came  into 
power  in  1906  a  general  land-value  tax  bill  applicable  to  Scot- 
land was  passed  in  second  reading,  by  a  large  majority.  It  was 
then  referred  to  a  committee,  and  on  their  recommendation  it 
was  withdrawn  in  favor  of  a  local  valuation  bill.  This  Scotch 
land-valuation  bill  passed  the  House  by  a  large  majority  in  1907, 
but  was  rejected  by  the  Lords.  The  same  thing  happened  in 
1908.  In  1909  both  schemes,  the  EngUsh  and  the  Scotch,  were 
finally  taken  up  by  the  government  and  considerably  extended, 
not  only  applying  the  principle  to  Great  Britain  as  a  whole, 
but  also  including  several  additional  kinds  of  land  taxes.  With 
the  political  struggle  which  resulted  in  the  complete  triumph 
of  the  Commons  we  have  not  to  deal  here.  The  important  point 
was  the  final  acceptance  by  the  country  of  the  principle  of  the 
land  taxes. 

The  new  land  taxes  were  four  in  number:  the  undeveloped- 


I 


]V 


490 


ESSAYS  IN  TAXATION 


land  duty,  the  increment-value  duty,  the  reversion  duty  and  the 
mineral-rights  duty.^ 

The  undeveloped-land  duty  is  a  tax  of  one  halfpenny  on  the 
pound  on  the  site  value  of  undeveloped  land.    Land  is  declared 
to  be  undeveloped  if  it  has  not  been  developed  by  the  erection 
of  dwelling  houses  or  glasshouses  or  greenhouses  or  buildings 
for  the  purpose  of  any  business,  trade  or  industry  other  than 
agriculture,  or  is  not  otherwise  used  bona  fide  for  any  such 
business.     Although  the  rate  of  this  tax  is  very  low,  it  was 
feared  that  the  scheme  might  prove  to  be  an  entering  wedge  for 
future  increased  taxation;  and  this  apprehension  explains  the 
strong  opposition  which  the  proposal  excited.    As  the  bill  went 
through  the  House  it  was  considerably  altered.    As  it  reached 
the  Lords  and  was  enacted  into  law,  it  provided  that  the  tax 
should  not  be  applied  to  any  land  where  the  site  value  did  not 
exceed  £50  per  acre.     This  at  once  exempted  most  of  the 
agricultural  land.     It  was  also  provided  that,  in  the  case  of 
agricultural  land  where  the  site  value  exceeds  £50  per  acre,  the 
tax  should  be  chargeable  only  on  the  amount  by  which  the  site 
value  exceeds  the  value  of  the  land  for  agricultural  purposes. 
No  duty,  moreover,  is  assessed  on  small  holdings,  that  is,  on 
agricultural  land  occupied  and  cultivated  by  the  owner,  pro- 
vided that  the  total  value  of  all  land  owned  by  him  does  not 
exceed  £500.     Ownership  under  this  clause  includes  leases  of 
fifty  years  or  more.     Other  exemptions  are  made  in  the  case 
of  parks,  gardens,  open  spaces  to  which  the  public  have  access 
as  of  right  or  to  which  the  public  enjoy  reasonable  access,  land 
used  for  games  or  recreations  when  such  use  is  not  of  a  purely 
temporary  character,  and  in  general  any  land  where  the  com- 
missioners think  that  it  is  desirable  for  social  purposes  to  keep 
the  land  free  from  buildings.    Furthermore,  no  duty  is  charged 
on  the  site  value  of  one  acre  of  land,  whatever  its  use,  occupied 
with  a  dwelling  house,  nor  on  the  site  value  of  five  acres  of 
garden  or  pleasure  grounds  occupied  with  a  dwelling  house, 
provided  that  the  site  value  in  question  does  not  exceed  twenty 
times  the  annual  value  of  the  land  and  house  as  assessed  to  the 
income  tax.    Again,  it  is  to  be  noticed  that  when  money  has 

*  J.  Wylie,  The  Duties  on  Land  Values  and  Mineral  Rights  under  part  I 
of  the  Finance  (1909-10)  Act  (London,  1910).  Cf.  also  a  hrief  but  excellent 
account  in  the  Fifty-fourth  Refmrt  of  the  Cormnissioners  of  Inland  Revenue 
(1911),  p.  149  et  seq.  For  a  bibliography  see  Y.  Scheftel,  The  Taxation  of 
Land  Value.    Boston,  1916,  pp.  473-478. 


RECENT  REFORMS  IN  TAXATION 


491 


been  expended  within  ten  ^  years  on  roads,  sewers,  etc.,  with  a 
view  to  the  development  of  land  included  in  a  scheme  of  land 
development,  the  land  is  to  be  deemed  developed  to  the  extent 
of  one  acre  for  every  £100  of  such  expenditure,  and  to  that 
extent  therefore  exempted  from  duty.  Finally,  when  the 
increased-value  duty  mentioned  in  the  next  paragraph  has  been 
paid  on  any  undeveloped  land,  the  site  value  is  to  be  reduced 
by  a  sum  equal  to  five  times  the  amount  of  such  duty. 

In  the  second  place,  we  come  to  what  is  perhaps  the  most 
interesting  part  of  the  entire  scheme,  the  increment-value  duty. 
This  tax  is  payable  when  land  changes  hands  under  certain 
conditions;  that  is,  it  is  levied  on  the  following  occasions: 
(1)  the  sale  of  any  land  or  interest  therein;  (2)  its  lease  for  a 
period  of  more  than  fourteen  years;  (3)  its  passing  to  a  new 
owner  by  reason  of  death;  ^  (4)  in  the  case  of  land  which  is  held 
by  anybody  corporate  or  incorporate,  and  which  therefore  does 
not  change  hands,  the  tax  is  levied  every  fifteen  years,  with  the 
privilege  on  the  part  of  the  owner  of  paying  in  fifteen  yearly 
instalments.  On  each  of  these  four  occasions  the  site  value  of 
the  land  is  determined,  and  the  excess,  if  any,  of  the  site  value 
thus  ascertained  (commonly  called  the  occasion  site  value)  over 
the  original  site  value  constitutes  the  increment  value.  An  in- 
crement value  of  ten  per  cent  is  not  taxable;  but  on  the  excess 
of  all  increments  of  value  over  ten  per  cent  a  tax  is  imposed  at  the 
rate  of  twenty  per  cent.  In  other  words,  the  tax  amounts  to  a 
fifth  of  any  periodical  increase  in  value  over  ten  per  cent. 
"The  original  site  value"  is  the  site  value  as  of  April  30,  1909; 
and  on  each  successive  "occasion,"  when  the  site  value  is  com- 
pared with  its  original  value,  credit  is  to  be  allowed  for  the  duty 
paid  on  previous  occasions.  The  balance,  called  the  "duty 
unsatisfied,"  is  therefore  really  a  tax  on  the  entire  increment 
since  the  last  settlement.  In  case  of  a  fee  simple  of  land,  the 
calculation  is  easy;  but  where  the  interest  is  less  than  the  fee 
simple,  the  duty  collectible  is  proportionately  reduced,  the  bal- 
ance ultimately  going  to  the  exchequer  as  occasions  which 
affect  the  other  interests  in  the  land  may  arise. 

^  This  period  was  increased  to  twenty  years  by  the  Revenue  Act  of  1911. 

2  An  interest  expectant  on  the  termination  of  a  life  or  lives  is  not  an  in- 
terest in  land  within  the  meaning  of  the  law.  When  a  life  tenant  dies,  the 
full  tax  is  payable;  but  when  the  land  is  subject  to  a  settlement,  the  duty 
may  be  charged  on  the  land  by  the  persons  hable  to  pay.  Moreover,  in- 
crement-value duty  on  death  is  not  payable  more  than  once  during  the 
continuance  of  the  settlement. 


\ 


I 

■I 


I 


492 


ESSAYS  IN  TAXATION 


In  order  to  provide  for  any  possible  hardship  arising  from  a 
depreciation  in  the  value  of  the  land,  it  is  provided  that  when 
land  has  been  sold  or  leased  within  twenty  years  preceding 
April  30,  1909,  there  may  be  substituted  for  the  original  site 
value  one  based  on  the  consideration  for  the  sale  or  the  sum 
secured  by  mortgage.  The  Revenue  Act  of  1911  still  further 
extends  this  concession  and  permits  a  substitute  site  value 
based  on  the  purchase  price  paid  by  the  owner  of  the  land  or 
of  any  interest  therein  at  any  period  during  his  lifetime,  pro- 
vided he  is  still  the  owner  at  the  date  of  application. 

The  exemptions  from  increment-value  duty  include:  (1)  agri- 
cultural land,  while  that  land  has  no  higher  value  than  its  market 
value  at  the  time  for  agricultural  purposes  only;  (2)  small  houses 
and  properties  which  have  been  in  the  occupation  of  the  owner 
for  twelve  months,  provided  that  he  does  not  own  more  than 
fifty  acres  in  all  and  that  the  land  does  not  exceed  seventy-five 
pounds  an  acre;  (3)  land  held  by  a  body  corporate  or  incorpo- 
rate and  used  for  games  or  recreation;  (4)  the  lease  of  tenements 
or  flats  in  an  apartment  house.  The  tax  is  paid  by  stamps,  as 
a  stamp  duty;  and  in  case  of  sales  or  leases  a  stamped  instru- 
ment must  be  presented  showing  that  the  tax  has  been  paid 
or  that  it  is  not  payable.  In  the  case  of  transfers  arising  from 
death,  the  increment-value  duty  is  to  be  collected  in  accord- 
ance with  the  provisions  governing  the  payment  of  the  estate 
duty. 

The  third  of  the  land  taxes  is  the  so-called  reversion  duty, 
which  is  payable  at  the  termination  of  any  lease  of  land.  It  is 
a  tax  of  ten  per  cent  on  the  value  of  the  benefit  accruing  to  the 
lessor  by  reason  of  the  termination  of  the  lease.  The  value  of 
the  benefit  is  ascertained  by  taking  the  total  value  of  the  land 
at  the  time  the  lease  terminates,  less  such  amount  as  is  attribu- 
table to  work  done  or  capital  invested  by  the  lessor,  and  deduct- 
ing from  the  balance  the  value  of  the  land  at  the  time  the  lease 
was  originally  made,  as  ascertained  on  the  basis  of  the  consider- 
ation for  the  lease.  The  reversion  duty  is  not  charged  on  agri- 
cultural land  nor  on  leases  under  twenty-one  years  nor  when 
the  reversion  has  been  purchased  before  1909,  and  the  lease 
terminates  within  forty  years  of  the  purchase  date  otherwise 
than  by  agreement  between  lessor  and  lessee.  The  duty  is 
payable  by  the  lessor,  who  is  required,  on  the  termination  of 
the  lease,  to  give  particulars  of  the  land  and  his  estimate  of  the 
benefit  accruing.     Provision  is  also  made  that  reversion  duty 


RECENT  REFORMS  IN  TAXATION 


493 


and  increment-value  duty  shall  not  both  be  paid  on  the  same 

increase  of  value.  . ,      r  u  a 

In  the  fourth  place,  the  new  law  provides  for  a  so-called 
mineral-rights  duty,  which  is  a  tax  of  five  per  cent  on  the  rental 
value  of  all  rights  to  work  minerals  and  of  all  mmeral  way 
leaves.i  From  the  taxable  minerals,  however,  clay,  brick,  earth, 
sand,  chalk,  limestone  and  gravel  are  excepted.  The  tax  is 
assessed  on  the  proprietor  or  immediate  lessor,  and  if  the  latter 
is  himself  a  lessee  he  is  entitled  to  recover  by  deducting  the 

tax  from  the  rent  paid.  ,  ,     j  j  + 

In  the  case  of  mineral  lands  neither  undeveloped-land  duty 
nor  reversion  duty  is  payable.    So  far  as  increment-value  duty 
is  concerned,  minerals  are  not  subject  to  the  tax  so  long  as  they 
remain  unworked.    If,  however,  they  begin  to  be  worked  after 
1909,  increment-value  duty  becomes  payable  m  any  year  in 
which  the  output  of  the  mine,  as  reflected  by  the  royalties  paid 
in  the  year,  exceeds  eight  per  cent  of  the  capital  value  of  the 
minerals.    In  computing  this  increment  value,  an  allowance  is 
made  for  any  portion  of  the  rental  value  which  represents  a  re- 
turn for  sums  expended  within  fifteen  years  by  the  lessor  in 
boring  or  otherwise  proving  the  minerals.     When  mcrement- 
value  duty  is  paid  on  minerals,  the  amount  of  the  tax  is  de- 
ducted from  the  mineral-rights  duty  chargeable  in  that  year. 
A  general  provision  applying  to  all  the  land  taxes  is  that 
when  any  betterment  charges  (or  what  in  America  are  called 
special  assessments)  have  been  levied,  allowance  is  to  be  made 
therefor  by  deducting  such  charge  from  the  mcrement  value 
of  the  land,  in  the  case  of  increment-value  duty;  from  the  site 
value  of  the  land,  in  the  case  of  undeveloped-land  duty;  and 
from  the  value  of  the  benefit  accruing  to  the  lessor,  in  the  case 

of  reversion  duty.  .^     -n  i 

With  reference  to  all  these  four  land  taxes,  it  will  be  recog- 
nized that  their  successful  operation  depends  upon  an  exact  valu- 
ation of  the  land.  The  requisite  survey  and  valuation  are  pro- 
vided for  on  a  most  comprehensive  scale,  their  purpose  being  to 
determine  the  value  of  all  land  in  the  United  Kingdom  as  it 
existed  on  April  30,  1909.    The  definitions  of  the  terms  used  in 

1  A  mineral  way  leave  is  defined  as  "any  way  of  leave,  air  leave,  water 
leave,  or  right  to  use  a  shaft  granted  to  or  enjoyed  by  a  working  lessee, 
whether  above  or  underground,  for  the  purpose  of  access  to  or  the  convey- 
Tce  of  the  minerals  or  the  ventilation  or  drainage  of  his  mine  or  other^'ise 
in  connection  with  the  working  of  the  minerals." 


494 


ESSAYS  IN  TAXATION 


1 


m 


1 


ri^l'^l^CZ'^Z^t:-,^^^^^^^^      r^  -te  value,  are 
ing  the  valuatL  ipe^'from  th!  ^ 

hereditaments  in  the  Cf^^^  ^       ^"*  *•"**  ^''^  ""^ber  of 
millions.    When  the  vSu«i^*T  ''T ""'^  *°  ^''""^  "'even 

they  will  form  a  to^fse i  oU%ol"r  ^^'  ^^P'''*^' 
book  of  the  eleventh  rent,?^  t^  ^  *''''  ^'""°"«  Domesday 
to  work,  and  wlare  toM  th^;  •  ^k  ^°^«"""«"t  has  already  set 
has  bee;  found  an  estlwhih  t  "''"'''  °^*'?'^  ^""^^^  "^ere 
the  same  familyTom the  toe  ^mmZlCc''''  '"''^^  "' 
the  present  day.=  A  good  beeinninl  h!.  ^^^n^ueror  to 
process  of  valuation  alfholh  if  t  .  f  .    '  ''•*"  "^^^  ^  *e 

is  completed.    £  gove—  esHmof  '.r'°"  '"''"^  •"'f°>-«  '* 
million  pounds  andthp  hT       '^^"^''^'^  t^e  cost  at  about  two 

tion  at  about  five  yell  Tn  C^ "^  ^  '"'"''''*'"^  "'^  ^'*'"'*- 
result  of  the  new  land  tax  "  t^.f,^'^"*™^  "atumlly,  the  fiscal 

slight  ^PortaZ':t^J,T^^:'CTStf^  "  'n  '""^ 
was  among  the  cleverest  movp»  TtK  **'*'  "®^  t^^^es 

with  the  landal  ntoes  7or  I  n  f  ^T'"*'"*  ^  "^  «o"test 
raising  the  c^  oftShip  It'rsame  W  t""''"  '""^ 
are  expected  ultimately  to  yfeldasubTnnrf  **  "^"^  *'*''^" 
competent  authorities  estoft!;*     ^"f^'*^f"*'^'  revenue;  some 

present  rate,  to Sween  five  and  s"  millL^T""*'  ''  *•>« 
It  was  originally  proposed  t^d^evot^relJa"   oltlrrfo 

the  value  of  the  cleared  "ue  "'' ^''^"'" ''"'' «^  ™'"«' and 

value  and  fuU  site  value-  (M  „„T  1.  ^7  .  "'"^^rencc  between  gross 
development,  ar^pro^riaUon  for  n„b«^T'^  ^"'"^  ''"j  »"  expenditure  on 
nent  burdens,  /^,  on'  the  ^artV^Hn^ J  i^rft  ."',  T'"'" 
pense  of  clearing  the  site  where  this  iTnl  r       .    *"  '""'' '  W  the  e.f- 

the  full  site  value  neces.sary  for  the  purpose  of  reaUzing 

Speaking  generally,  therefore  emiq  v«I,.«  „„j  r  n  •. 
respectively  the  value  of  the"ite™ovcS  and  ,h  T  ?'"^«'P'-<«ent 
reference  to  burdens  or  restric  ons  -fw.f  .  """  "^'"'"^  «'''•«>'" 
mately  to  market  value.  ^«Sble  si  Jvl.  "^  "'^"^Ponds  appm..i. 
the  cleared  site  would  fetch  inCneLn„„I;rjP"^"*'  **"=  ?"•=«  ^^ich 
the  outlay  incurred  bv  thn  o»-r,„  P^^'^nf"*.  burdens  remained  and  none  of 

8ite  had  been  e"S„7j'"'  ^  //"TtT "^ "'  °?^™*  ^P'o"''^  the 
His  Majesty's  llrTL^^ipf  ,%^  "^ '"^  Commis^Jrs  of 


RECENT  REFORMS  IN  TAXATION 


495 


the  relief  of  local  taxation.  This  plan,  however,  was  abandoned 
before  the  law  was  enacted,  and  the  consideration  of  the  point 
was  deferred  until  the  time  when  the  relations  between  local 
and  general  finance  are  readjusted.^ 

From  this  brief  survey  of  the  provisions  of  the  budget  it  will 
be  recognized  that  England  is  putting  herself  at  the  head  of 
those  nations  which  are  seeking  to  realize  the  importance  of  the 
newer  considerations  in  the  theory  of  taxable  capacity.    In  some 
respects  the  reform  is  not  so  drastic  as  it  might  at  first  appear; 
for  in  that  part  of  the  budget  which  aroused  the  greatest  opposi- 
tion, namely,  the  undeveloped-land  duty,  England,  as  is  pointed 
out  above,  had  been  lagging  behind  some  other  countries.    The 
introduction  of  a  tax  on  the  capital  value  of  land,  irrespective  of 
its  rental  value,  merely  puts  England  in  a  position  which  has 
long  since  been  achieved,  for  example,  by  the  United  States.    In 
the  matter  of  the  unearned-increment  duty,  also,  England  had 
been  preceded  by  several  of  the  German  towns.    But  taking  it  as 
a  whole,  the  English  system  is  in  advance  of  that  in  any  other 
leading  country.     For  it  applies  to  the  income  tax  both  the 
principle  of  differentiation  and  that  of  graduation,  of  which 
only  the  one  or  the  other  is  found  in  other  countries;  and  it 
introduces  into  the  inheritance  tax  a  scale  of  progression  more 
drastic  than  it  has  thus  far  been  found  possible  to  secure  else- 

where. 

It  will  be  seen,  therefore,  that  England  is  attempting  to  real- 
ize the  more  modern  social  ideals  in  taxation.    In  the  first  place, 
so  far  as  the  great  mass  of  indirect  taxes  are  concerned,  England 
not  only  retains,  but  increases,  those  particular  mdirect  taxes 
whose  social  effects  may  be  considered  on  the  whole  relatively 
innocuous.    It  does  not  attempt  to  revert  to  the  discarded  sys- 
tem of  the  past,  but  confines  itself  virtually  to  the  three  great 
categories  of  spirits,  tobacco  and  stamp  taxation.     It  thus 
spreads  over  the  community  as  a  whole  the  burdens  of  a  system 
of  taxes  which  tends  to  decrease  the  weight  of  the  direct  taxes. 
Secondly,  in  the  case  of  the  direct  taxes,  England  is  approaching 
the  reaUzation  of  the  social  ideals  contained  in  the  modem 
theory  of  faculty  or  ability  to  pay.    For  the  modern  conception 
of  ability  to  pay  includes  far  more  than  the  sacrifice  theory  as 
formulated  by  John  Stuart  Mill.     The  sacrifice  theory  looks 
primarily  at  the  disposition  of  a  man's  wealth;  the  newer  idea 

1  As  to  this  point,  see  J.  Watson  Grice,  National  and  Local  Firmnce 
(London,  1910),  and  Sydney  Webb,  Grants  in  Aid,  London,  1910. 


1 


f 


496 


ESSAYS  IN  TAXATION 


Thp  nif  P'^''?^*''  ^^'"«'>  '°«ks  at  the  acquisition  of  the  wealth. 

the  older  doctrine  was  a  consumption  doctrine;  the  newer 
doctrine  is  a  production  doctrine.  The  modern  th;oo^  of  abU- 
ity  to  pay  IS  a  compound  of  both  elements.     The  sacrifice 

heory  is  seen  m  the  various  applications  of  the  idea  of  ^ogrS 
sion  or  graduation  of  taxation.     The  privilege  theoiy  is  sSn 

comTtt  andt  T'"'  "'  <«fferentiation  as  applied  To  theTn- 
come  tax  and  in  the  mcrcinont-value  duty 

triUluf^^'n'  ''•"'f  *•  *'>«'«f°'-«-  i«  not  to  1^  regarded  as  a 
triumph  for  the  .single  ta.xe,^.  It  accepts  indeed  a  small  part  of 
the  single-tax  reasoning,  but  it  refuses  to  Ik.  bound  by  ft  narJow 
imitations.    It  adopts  the  idea  of  privilege,  which  the  Irie 

wwSl  tn  H  t  P'*'"*'""^^  ^''™  °f  P"^"''^*''  the  aboUtion  of 
which  IS  so  dear  to  them.    The  English  budget  not  only  general- 

rcrificrrnTt'h"""  ^^""'T'  '^"^  •'°'"''^"-  ^'^  "™i 

sac,  hce,  and  the  result  is  a  scheme  of  taxation  which  is,  on  the 
whole,  in  advance  of  that  existing  anywhere  else  in  the  civi"ized 
worl.1  and  which,  in  some  of  its  elements  at  least,  may  weU 
serve  as  a  model  for  the  United  States. 

The  forces  which  are  responsible  for  Lloyd  George's  budeet 
are  gradually  eavening  the  life  of  all  modern  civilized  socie?£ 
and  the  translation  into  the  fiscal  sphere  of  these  social  forces 
cannot  much  onger  be  delayed,  whether  in  America  or  on  thi 
European  continent.  The  new  English  laws  are,  at  bottom  the 
fiscal  expression  of  a  great  social  development.  ■ 

III.  Germany 

thrt  Jo]J'"/'r''''^  "^^^''^  ^^"  ^''""^  P^^^^^"^  i"  Germany  is 
?n?n.t  'th'  T  ^^«P^f  ^vely  with  national,  state  and  local 
finance.  The  reforms  of  1891-93,  which  have  been  described 
in    he  precedmg  chapter,  were  concerned  primarily  with  state 

iTnlSf  r"/ J'^  "'r^  ^'  1909-lo'deal  m^orTpaS 
larly  wi  h  federal  finance.  But  the  problems  of  federal  finance 
are  so  closely  mterwoven  with  those  of  state  and  local  finance 

AM  ^°-^l?  ^^^  ^^  •  ^^"^  enforcement  of  the  land-value  laws  met  with  ^uoh 
determmed  opposition,  that  all  further  attempts  to  proeeecl  u^fthe  valua 
tion  o    land  and  to  enforce  the  laws  were  discontinued  in  1920  on  th; 
ground  that  the  expenses  of  administration  cxceale^I  the  Lem^;     The 
otal  revenue  frmn  the  increased  value,  the  reversion,  an  Hhe  undevelon^ 

^  wa  Tm^^^  ^'^^"^r  ^^'  '^'^  -^  ^he  cost  of  vXt 

uon  was  12  178,397.    Then  came  the  war,  and  a  further  disorcanizatJon 
Cf,  Report  from  the  Select  Committee  on  Land  Vali^s,   19^    p    78  ' 


RECENT  REFORMS  IN  TAXATION 


497 


that  in  order  to  obtain  a  clear  understanding  it  is  necessary  to 
consider  them  together. 

The  characteristic  features  of  the  Prussian  reforms  of  1891-93, 
recounted  in  the  preceding  chapter,  were  the  replacement  of  the 
old  state  taxes  on  produce  by  a  modernized  income  tax,  and 
the  addition  to  the  income  tax  of  a  light  supplementary  property 
tax.  This  property  tax  was  designed  to  secure  a  differentiation 
of  the  income  tax  by  imposing  a  somewhat  heavier  burden  upon 
income  from  property  than  upon  those  incomes  which  in  Eng- 
land are  described  as  earned.  The  movement  so  successfully 
inaugurated  by  Prussia  gradually  spread  throughout  the  empire. 
Bavaria,  which  was  the  last  of  the  large  German  states  to  adopt 
the  income  tax,  took  this  step  in  1910,  and  the  same  year  marked 
the  adoption  of  the  supplementary  property  tax  in  the  smaller 
states  of  Sachsen-Meiningen  and  Sachsen-Weimar.^  At  the 
beginning  of  1912  the  general  income  tax  existed  in  all  the 
twenty-five  German  states,  except  the  two  Mecklenburgs,  while 
the  supplementary  property  tax  had  been  introduced  in  nine 
states,  including  Prussia,  Saxony,  Hessia  and  six  of  the  smaller 
commonwealths. 

Side  by  side  with  this  general  movement  came,  although  a 
little  later,  the  gradual  adoption  of  a  system  of  state  inheritance 
taxes.  The  law  of  1891  in  Prussia  had  indeed  reformed  the 
older  system  of  probate  fees,  and  had  introduced  a  light  tax  on 
collateral  inheritances  with  rates  graduated  from  one  to  eight 
per  cent,  according  to  the  degree  of  relationship.  It  was  not 
until  1899  that  Baden  introduced  a  very  slightly  progressive 
direct-inheritance  tax.  From  this  time  on,  until  1906,  when  the 
imperial  government  intervened,  many  of  the  German  states 
levied  direct-inheritance  taxes,  with  progressive  scales  that 
gradually  became  steeper  and  steeper.  Thus  in  general  it  may 
be  said  that,  in  view  of  this  double  movement  toward  income 
and  inheritance  taxes,  the  German  reform  of  state  taxation  was 
proceeding  along  the  fines  of  faculty  or  abiUty  to  pay. 

When,  however,  we  come  to  consider  federal  taxation,  the 
story  is  a  very  different  one.  The  reform  of  1909  cannot  be 
understood  without  giving  a  short  review  of  federal  finance. 

1  An  account  of  the  development  in  the  separate  states  to  the  end  of  the 
year  1909  is  to  be  found  in  Seiigman,  The  Income  Tax,  part  I.,  book  2,  chap- 
ter 1,  of  paragraph  6.  In  the  same  chapter  will  also  be  found  a  detailed  ac- 
count of  the  minor  changes  introduced  into  the  Prussian  income  tax  by  the 
laws  of  1906  and  1909. 


L 


! 


h     ' 


498 


ESSAYS  IN  TAXATION 


Prior  to  the  establishment  of  German  political  unity,  customs 
duties  had  been  collected  for  the  common  account  of  the  German 
Customs  Union.  In  1867,  when  the  North  German  Federation 
was  organized,  and  in  1871,  when  the  German  Empire  was 
established,  these  duties  and  the  other  common  receipts  of  the 
Customs  Union  were  assigned  to  the  federation,  respectively  to 
the  empire;  and  it  was  provided  that  until  the  federal  govern- 
ment should  levy  independent  taxes  of  its  own,  the  federal 
expenses  should  be  met  by  contributions  from  the  various 
states.  These  contributions,  analogous  to  the  American  req- 
uisitions during  the  period  of  the  first  constitution  from  1781 
to  1789,  are  known  as  Matricular-Beitrdge.  During  the  sev- 
enties, although  ''extraordinary'^  income  to  the  amount  of 
nearly  3,000  million  marks  was  drawn  from  the  French  war  in- 
demnity, it  was  found  necessary  to  collect  such  contributions 
from  the  states:  from  1872  to  1878  inclusive  they  averaged 
nearly  65  million  marks  annually. 

After  1879,  however,  in  consequence  of  the  higher  customs 
duties  established  in  that  year,  the  direct  receipts  of  the  empire 
became  greater  than  its  expenditures.    The  state  contributions 
to  the  empire,  which  were  now  obviously  unnecessary,  were 
nevertheless  retained,   largely  for  political  reasons;  and  the 
following  somewhat  complicated  arrangement  was  established: 
the  surplus  of  all  revenues  from  imports  and  from  the  federal 
excise  on  tobacco,  in  excess  of  130  million  marks,  was  assigned 
or  allotted   to   the   separate   states;   the  state   contributions 
needed  to  balance  the  imperial  budget  were  charged  against 
the  several  states  and  set  off  against  their  respective  allotments 
(as  both  allotments  and  contributions  were  distributed  per  capita 
of  the  population,  the  set-off  was  perfect);  and  any  surplus 
of  allotments  over  contributions  was  paid  to  the  states.    Con- 
tributions charged  against  the  states  under  this  arrangement 
were,  a  little  later  on,  called  "covered"  contributions,  because 
exactly  covered  by  the  allotments;  while  any  additional  contri- 
butions over  and  above  the  allotments  received  the  name  of  "  un- 
covered "  contributions.   But  for  years,  as  just  explained,  all  the 
contributions  were  covered  contributions.    It  was  really  a  mat- 
ter of  bookkeeping,  as  no  Beitrdge  were  actually  paid  by  the 
states  after  1879,  the  states  receiving  in  cash  the  balances  of 
their  allotments  over  their  contributions.    During  the  ensuing 
years  these  balances  grew,  because  certain  surpluses  of  other 
federal  taxes  (stamp  taxes  and  taxes  on  spirits)  were  also  as- 


RECENT  REFORMS  IN  TAXATION 


499 


signed  to  the  states.  It  should  be  noted  that  all  the  federal 
taxes  that  had  been  imposed  up  to  1891  were  indirect  taxes. 

During  the  last  two  decades  of  the  century  the  states  thus 
received,  through  federal  grants,  more  than  was  charged  to  them 
in  the  way  of  contributions;  and  from  1896  to  1900  laws  were 
passed  from  year  to  year  regulating  certain  details  of  the  sur- 
plus allotment  to  the  various  states.  By  the  end  of  the  century, 
however,  a  change  took  place.  The  increasing  expenditures 
of  the  empire,  especially  for  armaments,  changed  the  surpluses 
into  deficits,  and  the  various  states  had  now  again  to  make 
uncovered  contributions  or  actual  Beitrdge  to  the  empire. 
Moreover,  the  system  of  federal  grants  to  the  states  began  to 
introduce  considerable  confusion  into  the  state  budgets,  as 
the  states  could  never  tell  beforehand  exactly  how  much  was 
coming  to  them.  Accordingly,  in  1904,  the  system  of  federal 
grants  was  abolished,  so  far  as  the  surpluses  from  customs  and 
the  tobacco  tax  were  concerned,  leaving  only  some  of  the  stamp 
taxes  and  the  spirits  tax  subject  to  the  old  arrangement. 

In  the  year  1906  the  increasing  needs  of  the  imperial  govern- 
ment led  to  the  adoption  of  a  number  of  new  federal  taxes,  so 
that  the  system  henceforth  included,  in  addition  to  the  customs 
duties,  internal  taxes  on  tobacco,  sugar,  salt,  champagne,  beer, 
playing  cards  and  spirituous  liquors  and  stamp  taxes  on  securi- 
ties, sales,  lotteries,  railroad  freight  receipts  and  passenger  tickets. 
An  important  feature  of  the  law  of  1906  was  the  introduction 
of  a  federal  inheritance  tax,  from  which  direct  descendants  were 
exempt.  The  rates  varied  from  four  to  ten  per  cent,  according  to 
the  degree  of  relationship;  and  in  the  case  of  inheritances  of  over 
20,000  marks  additions  to  the  respective  rates  were  imposed, 
rising,  in  the  case  of  inheritances  over  one  million  marks,  to  two 
and  one-half  times  the  original  rate.  The  tax  was  to  be  levied, 
however,  by  the  separate  states,  subject  to  the  federal  law  gov- 
erning double  taxation,  and  subject  also  to  supervision  on  the 
part  of  the  imperial  authorities.  Two-thirds  of  the  yield  of  the 
inheritance  tax  was  to  go  to  the  empire,  one-third  to  the  separate 
states,  which  now  were  to  abandon  their  own  inheritance  taxes. 
It  waS;  however,  provided  that  for  a  few  years,  each  state  should 
be  guaranteed  against  any  loss  of  revenue  from  the  readjust- 
ment. So  far  as  the  indirect  taxes  were  concerned,  the  old 
system  of  federal  grants  to  the  states  was  retained  only  in  the 
case  of  spirituous  liquors  and  the  stamp  taxes  on  securities,  sales 
and  lotteries.    The  law  of  1906  also  provided  for  a  postpone- 


III 


500 


ESSAYS  m  TAXATION 


inent  (Stundung)  in  the  payment  by  the  states  of  their  con- 
tributions, whenever  the  excess  of  these  contributions  over 
the  federal  grants  should  amount  to  more  than  40  pf.  per  head 
of  population. 

The  immense  outlays  for  the  navy,  however,  caused  such  a 
defacit  m  the  imperial  finances  and  promised  to  be  such  a  burden 
on  the  states,  through  calls  for  contributions,  that  it  became 
necessary  to  readjust  the  whole  system. ^     It  was  generally 
recognized   that   an   additional   independent   federal   revenue 
of  500  million  marks  a  year  had  become  imperative.     It  was 
also  conceded  that  the  greater  part  of  this  addition  must  come 
from   indirect   taxes,    the   government   itself   proposing   that 
400  of  the  500  millions  should  be  derived  from  this  source. 
As  regards  the  remaining  100  millions,  the  government  sug- 
gested an  imperial  inheritance  tax,  to  be  extended  to  direct  de- 
scendants, and  with  rates  on  other  relatives  considerably  higher 
than  under  the  existing  law.    The  exact  proposal  was  to  add 
to  the  existing  inheritance  tax,  which  was  payable  on  the  indi- 
vidual shares,  a  tax  on  the  whole  estate,  like  the  English  estate 
duty,  with  rates  ranging  from  one-half  of  one  per  cent,  to  three 
per  cent.    The  project  included  the  interesting  provision  that 
where  the  estate  had  previously  passed  within  five  years  the  tax 
should  not  again  be  levied,  and  that  when  the  estate  had  previ- 
ously passed  within  ten  years  only  one-half  of  the  rates  should 
be  imposed.    It  was  also  proposed  to  secure  for  the  federal  gov- 
ernment some  revenue  from  the  increment-value  land  taxes, 
which,  as  we  shall  see,  had  been  rapidly  developing  throughout 
Germany. 

The  government  proposals  were  met  by  counter-proposals  on 
the  part  of  the  large  landed  proprietors,  who  vigorously  objected 
to  the  new  estate  duty.  A  heated  discussion  ensued,  accom- 
panied by  a  deluge  of  literature.^' 

» For  a  Kood  statement  of  the  situation  sec  Professor  Adolf  Wagner's 
Die  Rnchsjinanznot  uiul  die  Pflichten  des  deutschen  Volks  mil  seiner  jwliti- 
schen  Parteien.  Ein  Mahnwort  eines  alien  Mannes,  Berlin  1908  Pro- 
fessor Wagner  suggested  that  a  part  of  the  needed  revenue  should  come 
from  an  imperial  inoome  tax. 

2  The  best  account  of  the  government  proposals  is  contained  in  Die 
Reichsjinnnzrejorm:  Ein  Fuhrer,  consisting  of  essays  by  prominent  publi- 
cists, and  publisheii  by  the  Vereinigung  zur  FiirderUng  der  Reichsfinanzre- 
form,  2  vols.  Berlm,  19(>9.  Many  other  books  or  pamphlets,  all  with  the 
same  general  title  Die  Reichsfinnnzrcform,  or  Zur  Reischsfinanzrcform  were 
published  by  professors,  officials,  prominent  business  men,  etc.  Among  the 
most  important  were  those  of  Minister  Sydow,  Graf  zu  Reventlow   Dr. 


RECENT  REFORMS  IN  TAXATION 


501 


The  government  was  ultimately  compelled  to  abandon  the 
proposed  taxes  on  wine,  gas  lighting  and  advertisements,  to 
reduce  the  increase  of  the  beer  tax  by  about  one-half,  and  to 
give  up  the  project  of  an  inheritance  tax.  This  last  fact  led 
to  the  resignation  of  the  imperial  chancellor.  The  law,  or 
properly  speaking  the  laws,  of  1909,  as  finally  adopted,  provided 
for  three  ehisses  of  measures:  the  raising  of  the  requisite  addi- 
tional revenue;  the  settlement  of  the  fiscal  relations  between 
the  empire  and  the  states;  and  the  adoption,  m  principle  at 
least,  of  an  imperial  tax  on  the  so-called  unearned  increment  of 
land.    Let  us  consider  each  of  these  in  turn. 

The  most  important  point  about  the  provision  for  the  addi- 
tional revenue  is  that  the  needed  mcrease,  namely,  500  millions, 
was  derived  entirely  from  the  new  or  augmented  indirect  taxes, 
with  the  exception  that  25  millions  were  to  be  secured  by  a 
slight  addition  to  the  Matricular-Beitrdge,  and  by  the  turning 
over  to  the  empire  of  three-fourths,  instead  of  two-thirds,  of 
the  existing  inheritance  tax.  In  detail  the  sources  of  the  addi- 
tional revenue  and  the  amounts  derived  from  each  source  were 
as  follows: 


TAXES 

Beer. 


MILUON 
MASKS 


TAXES 


MILLION 
MABKS 


100 
80 
43 
40 
37 
35 


Tobacco  and  cigarettes . . . 
Transfers  of  real  estate. . . 
Tea  and  coffee  imports. . . 

Sugar 

Dividends     and     interest 

(Talo7isteuer) 273^^ 

Matches 25 

Increase  of  state  contributions  and 
tax 


Securities 22)^ 

Electric  and  other  lamps. .  20 

Railroad  tickets 20 

Tickets    and    receipts    of 
bank    depjpsits     (stamp 

tax) ' 10 

Sparkling  wine 5 

Minor  stamp  taxes 10 


Total  from  taxes 475 

of  proportion  of  inheritance 
25 


Total  additional  revenue. . .  500 

Bendixen  and  Professors  Wagner,  Schmoller,  Lamprecht,  Brentano,  Schanz 
and  von  Heckel.  A  complete  list  of  this  literature  will  be  found  at  the  end 
of  volume  ii.  of  the  publication  mentioned  at  the  beginning  of  this  note. 
Cf.  also  Fritz  Schumann,  "Die  Reichsfinanzreform,"  in  Finanz-Archiv, 
vol.  27  (1910),  pp.  201-245,  followed  by  a  reprint  of  the  successive  laws 
themselves  on  pp.  246-393.  See  also  Lenschmann,  Die  Reichsfinanzreform, 
Berlm,  1909;  and  A.  Hesse,  "Die  Reichsfinanzgesetze  von  1909  "  in  Con- 
rad's Jarbucher,  vol.  38  (1909),  p.  721  el  seg. 


502 


ESSAYS  IN  TAXATION 


11 


All  these  were  either  new  taxes  or  additions  to  old  taxes 
with  the  exception  of  the  taxes  on  sugar  and  railroad  tickets! 
As  to  sugar  a  previous  law  (1908)  had  provided  that  the  existing 
tax  should  be  lowered,  beginning  in  1909,  from  fourteen  to  ten 
marks  per  100  kilograms,— an  estimated  reduction  of  about 
thirty-five  million  marks.  The  new  law  of  1909  provided  that 
this  reduction  should  not  go  into  effect  until  1914,  thus  retaining 
a  revenue  of  thirty-five  millions.  In  the  same  way  it  had  been 
originally  decided  to  drop  the  tax  on  railroad  tickets;  but  the 
new  law  continued  this  tax  and  thus  retained  twenty  millions 
ot  revenue. 

Of  tli^  new  or  additional  tajces,  the  most  important  was  that  on 
beer.  The  imperial  beer  tax  had  not  been  applicable  to  Bavaria, 
Wurtemburg  or  Baden,  which  had  reserved  the  right  of  levy- 
ing mdependent  taxes  on  beer.  The  law  of  1909  not  only 
applied  to  the  whole  empire  but  considerably  increased  the 

!?.n;.  J  ""^^  ""^^^  ""^  ^-^^  '^'''^  P^^  hectoliter,  changed  in 
lt)0b  to  vary  from  1.68  to  2.50  marks,  was  now  raised  to  4.30 
marks. 

In  the  case  of  spirituous  liquors,  the  government  first  en- 
deuvored  to  introduce  a  fiscal  monopoly,  reverting  to  a  scheme 
that  had  been  originally  introduced  in  1886.  When  the  monop- 
oly  project  was  defeated,  it  was  found  desirable  not  only  to 
increase  but  to  simplify  the  existing  taxes.  The  South  Ger- 
man states  had  been  subject  to  the  imperial  taxes  on  spirits 
since  1887,  but  there  had  grown  up  a  whole  code  of  taxes  on 
raw  material  on  process  and  on  product  {Maischbottichsteuer, 
Branntwein-Matenalsteuer,  Brennsieuer  and  Verhrauchsahgabe), 

•V   fcr^rT  *^^^^  ^""^^  ^^^'  namely,  the  tax  on  the  product 
Itself  (Verbrauchsabgabe)  was  retained,  but  it  was  now  materially 
increased  from  50-70  marks  per  hectoliter  to  105-125  marks 
according  as  it  was  within  or  without  the  "contingent."  ^   The 

'This  "contingent"  arrangement  is  very  complicated.    When  the  spirits 
tax  was  mcrea^ed  m  1887  to  70  marks  per  hectoliter  of  pure  alcohol  it  wa^ 

^n  TT  Z^^"^^^^!'  ^^  compensate  the  distillers,  the  tax  was  reduced  to 
InuTf  '  ^  P^ n  ""/  V^^  a^°"''^^'  ^^^^^'^^^  ^^d  ^^^  spirits  subject  to  this 
nnvl  nf  t^'^'^K  T""^.  '^'  "eontingent  spirits."  It  was  expectil  that  the 
pnce  of  the  whole  output  would  conform  to  the  higher  tax  of  70  marks  on 
the  non-con  mgent  part  of  the  supply,  and  that  therefore  the  domestic 
distil  er  would  get  a  bounty  of  20  marks  on  the  corresponding  part  This 
bounty  was  the  so-called  "love  contribution"  (Liebesabgabe) .  It  wk^ 
further  supFK)sed  that  if  there  should  be  such  a  change  in  the  domestic 


RECENT  REFORMS  IN  TAXATION 


503 


tax  was  also  graduated  according  to  the  size  of  the  distilleries 
and  a  distinction  was  made  between  agricultural  and  industrial 
distilleries. 

In  the  case  of  tobacco,  the  old  taxes  on  leaf,  were  increased, 
for  the  uncured  leaf  from  36  to  45  marks,  and  for  the  cured  leaf 
from  45  to  57  marks,  with  the  provision  that  in  case  of  very 
small  fields  a  tax  on  the  area  of  the  land  (four  and  one-half  pf, 
for  every  square  metre)  should  be  substituted.  In  the  case  of  cig- 
arettes the  tax  was  increased  so  as  to  vary  from  two  to  fifteen 
marks  per  thousand,  with  separate  taxes  on  cigarette  paper  and 
cigarette  tobacco.  Finally,  the  import  duties  on  tobacco  were 
considerably  increased. 

The  attempt  to  levy  a  general  tax  on  all  wine  came  to  a  disas- 
trous end.  All  that  could  be  done  was  to  increase  the  tax  on 
sparkling  wine  which  had  been  imposed  in  1902  at  the  rate  of 
from  10  to  50  pf.  per  bottle,  so  that  from  now  on  the  upper  limit 
of  the  tax  was  three  marks  per  bottle.  Of  the  other  taxes,  the 
stamp  tax  on  securities  was  raised  from  the  old  rate  (six-tenths 
of  one  per  cent  to  three  per  cent)  to  two  to  five  per  cent;  and  the 
stamp  tax  on  transfers  of  real  estate  was  increased  from  one- 
third  to  two-thirds  of  one  per  cent,  to  continue  until  a  tax  on 
land  increment  value  should  be  introduced.  In  addition  to  these 
increases  in  the  old  taxes,  new  taxes  were  laid  on  petroleum, 
six  to  ten  marks  per  100  kilograms;  on  electric  lamps,  5  pf.  to 
one  mark  per  lamp;  on  matches,  one  to  five  pf.  per  box;  on 

demand  that  none  of  the  70  marks  tax  on  spirits  should  be  needed,  the 
price  would  then  fall  and  the  bounty  disappear. 

As  a  matter  of  fact  there  always  remained  a  difference  of  20  marks  in  the 
price  between  the  contingent  and  the  non-contingent  spirits;  and  since 
two  million  hectoliters  were  used,  the  bounty  amounted  to  40  million 
marks,  the  so-called  Vierzig  Millionen  Geschenck.  But,  as  the  demand  fell 
off,  the  price  did  likewise,  so  that  the  distillers  really  made  no  more  than 
before. 

The  details  of  the  "Contingentierung"  were  changed  from  time  to  time. 
In  1887  the  contingent  was  fixed  at  four  and  one-half  liters  per  head  of 
population  every  five  years.  But  this  turned  out  to  be  unsatisfactory 
because  the  demand  for  liquor  stood  in  no  relation  to  population.  There- 
fore the  per  capita  calculation,  which  varied  the  contingent  according  to  the 
amount  of  alcohol  produced,  was  modified  according  to  changes  in  the 
process  of  manufacture,  the  amount  of  land  employed,  the  size  of  business, 
etc.  In  1902  further  modifications  were  made.  By  the  new  law  of  1909 
the  total  contingent  was  fixed  for  two  years  at  2,309,212  liters  of  pure 
alcohol,  being  apportioned  to  each  state  according  to  a  series  of  compli- 
cated rules. 


504 


ESSAYS  IN  TAXATION 


' 


I.. 


checks,  ten  pf.;  and  on  dividends  and  interest  (the  so-called 
J  ahnsteuer),^  one  per  cent. 

r-t'U^^-  ^^'^".that  Germany  has  gone  much  further  than 
Great  Britain  m  its  reliance  on  indirect  taxes.  It  can  hardly 
be  doubted  that  Germany  overshot  the  mark  in  refusing  to 
accept  the  inhentance-tax  project.  Indeed  it  is  not  at  all 
improbable  that  before  long  the  original  scheme  will  reappear 
But  even  with  the  possible  adoption  of  the  inheritance  tax.it  is 
obvious  that  the  great  mass  of  the  additional  revenue  will 
still  come  from  indirect  taxes. 

The  second  point  in  the  new  German  law  was  the  settlement 
of  the  contribution  question.     It  will  be  rememtered '  that 
just  before  the  new  law  went  into  effect  there  were  no  less  than 
three  kinds  of  Matricular-BeitrUge:  first,  the  "postponed  "  co^ 
tributions  referred  to  above;  second,  the  contributions  covered 
by  the  return  grants  from  the  empire  to  the  state;  and  third 
the  uncovered  contributions,  amounting  to  forty  pf.  per  head.^ 
1  he  postponed  contributions  were  now  abolished,  and  the  out- 
standing amount  of  144  million  marks  was  assumed  by  the 
empire,  to  be  funded  into  imperial  debt.     As  to  the  second 
category,  it  was  provided  that  there  should  henceforth  be  onlv 
one  class  of  imperial  grants  (Ueberweisungen),  namely,  those 
consisting  of  the  net  yield  of  the  tax  on  spirits  mentioned  above 
I'lnally  the  uncovered  contributions  were  increased  to  eighty 
Pf.  per  head.    Since,  however,  the  individual  states  were  hence- 
torth  to  retam  only  one-fourth  instead  of  one-third  of  the  in- 
hentance  tax,  it  was  provided  that  if  the  excess  of  contributions 

Tli'^^  T"""*"^  ,*°  "'"'•^  *''™  ^  '"^  fi-^«'  for  the  first  year 
at  48,512  million  marks,  and  changing  thereafter  according  to 
the  per  capita  provision  just  mentioned  the  surplus  should  be 

imperial  ffnl?  °"*  ""^ "" '"'"'  """"^  *''"'''  ^^^'  "^P"''  ^^"'  »"*  "^ 

The  thW  important  point  in  the  new  legislation  was  the 

adoption,  m  prmciple  at  least,  of  an  imperial  tax  on  the  unearned 

(coupon  sheets).    The     talon"  is  that  part  of  the  coupon  which  entitles 

'^  Cf.  supra,  page  498. 
'  Cf.  supra,  p.  500. 

m.*iJ^^^all?V4"'^r"*"^"*'T^  ^^^^  ^^^P^^al  grants  which  had  re- 
?(^7.  fj  u-  ^  """"'"  ""^^^'^  ^'"^"^  1^2  to  1906  rose  to  88  millions  in 
190/,  to  150  milhons  in  1908  and  to  232  millions  in  1909. 


RECENT  REFORMS  IN  TAXATION 


505 


increment  of  land.    This  matter  is  so  important  as  to  deserve  a 
separate  section. 

IV.  The  German  Tax  on  Unearned  Increment 
When  this  matter  came  up  for  discussion  in  parliament  it 
was  soon  recognized  that  more  time  would  be  needed  to  work 
out  the  details  of  an  adequate  law.  It  was  therefore  decided 
to  accept  only  the  principle  of  the  tax  and  to  postpone  the 
enactment  of  the  law  until  1911,  filling  up  the  gap  in  the  budg- 
et by  a  temporary  stamp  tax  on  sales  of  real  estate.  It  was 
found  desirable,  however,  for  various  reasons,  to  expedite  the 
preparation  of  the  bill,  which  was  finally  enacted  into  law  Feb- 
ruary 14th,  1910. 

Hitherto,  with  few  exceptions,  increment-value  taxes  on 
land  had  been  levied  only  by  municipalities.^    The  tax  was 

1 A  good  account  of  these  taxes  will  be  found  in  the  report  by  Bernard 
Mallet,  "The  Taxation  of  Increment  Value  in  Frankfort  and  other  German 
States,"  in  the  blue  book  entitled  Taxation  of  Land,  etc.  Papers  hearing  on 
Land  Taxes  and  on  Income  Tax,  etc.,  in  certain  Foreign  Countries,  and  on  the 
Working  of  Taxation  of  Site  Values  in  certain  States  of  the  United  Slates  and  in 
British  Colonies,  together  with  Extracts  relative  to  Land  Taxation  from  Re- 
ports of  Royal  Commissions  and  Parliamentary  Committees.  (Cd.  4750) 
London  (1909).  Cf.  Y.  Scheftel,  The  Taxation  of  Land  Value.  Boston, 
1910,  which  includes  chapters  on  Great  Britain  and  Australasia. 

In  Gennany  the  fullest  account  will  be  found  in  the  successive  numbers 
of  the  quarterly  periodical,  Jahrhuch  der  Bodenreform,  edited  by  A.  Dam- 
aschke.  Cf.  especially  the  article  by  Prof essor  Adolf  Wagner,  ''Zur  Recht- 
fertigung  der  Wertzuwachssteuer,  in  vol.  ii.  (1906).  Among  the  eariier  works 
the  most  important  are  Adolf  Weber,  Ueber  Bodenrente  und  Bodenspekula- 
iion  in  der  modernen  Stadt,  Leipzig,  1904;  R.  Brunhuber,  Die  Wertzuwachs- 
steuer in  Praxis  und  Teorie,  Jena,  1905;  Wesselski,  Z)ie  Beteiligung  der 
Stadtverwaltung  am  Boden-Wertzuwachs,  Berlin,  1905;  Pabst,  Die  Idee  einer 
Besteuerung  der  Konjunctur-Gewinne  an  Grundstiicken  und  Gebduden,  Berlin, 
1906;  Baumeister  und  Jager,  Die  Wertzuwachssteuer,  Berlin,  1906;  J.  V. 
Bredt,  Der  Wertzuwachs  an  Grundstiicken  und  seine  Besteuerung  in  Preu^sen, 
Berlin,  1907;  K.  Kumpmann,  Die  Wertzuwachssteuer,  Tubingen,  1907; 
J.  H.  Epstein,  Zur  Verteidigung  der  Zuwachssteuer,  Berlin,  1907;  M. 
Diefke,  Die  Wertzuwachssteuer,  Berlin,  1908.  Perhaps  the  best  of  all 
these  earlier  works  is  that  of  D.  Boldt,  Die  Werlzuwachssteuer,  3d  edition, 
Dortmund,  1909.  Among  the  later  works  are  those  of  Keller,  Die  Be- 
steuerung der  Gehaude  und  Baustcllcn  insbesondcre  Wcrtzuwachssleucrn,  Ber- 
lin, 1910;  H.  Weissenborn,  Die  Besteuerung  nach  dcm  Wertzuwachs,  Berhn, 
1910;  and  J.  S.  Steiger,  Die  Wertzuwachssteuer  in  Deidschland  und  der 
Schweiz,  Zurich,  1910;  Cf.  also  Fabrizio  Natoli,  Uimposta  sulV  incremento 
di  valore  del  suolo  urhano,  Palermo,  1908;  T.  Becu,  Impuestos  al  mayor 
valor  de  la  propriedad  immuehle,  Buenos  Aires,  1914;  M.  Petsche,  Les 
plus  values.     Base  d'imposition,  Paris,  1919. 


506 


ESSAYS  IN  TAXATION 


■| 


first  imposed  in  the  German  colony  of  Kiauchau  in  1898.   When 
the  German  government  took  over  that  possession  the  Admiral 
m  charge,  von  Diederich,  was  much  concerned  over  the  diffi- 
culties that  had  developed  in  some  of  the  Asiatic  colonies,  and 
especially  in  the  cities  opened  to  the  world's  trade  by  China  in 
18 Jo,  where  a  few  speculators  had  bought  up  much  of  the 
land  tor  ridiculously  small  sums  and  then  held  it  for  sale  to 
t.uropeans  at  very  high  prices.    The  German  government  was 
about  to  make  large  outlays  in  constructing  harbors,  erect- 
ing government  buildings  and  building  railroad  stations  and 
lactones.    The  admiral,  foreseeing  a  great  rise  in  land  values 
thought  that  it  would  be  desirable  for  the  government  to  pur- 
chase a  large  part  of  the  land  and  then  sell  it  to  intending  pur- 
chasers as  might  be  needed.    With  this  object  in  view,  he  issued 
on  the  very  day  of  occupancy,  November  14,  1897,  a  proc- 
lamation forbidding  any  transfer  of  land  without  the  author- 
ization of  the  government.     As  the  immediate  purchase  by 
the  government  turned  out,  however,  to  be  impracticable, 
the  admiral  contented  himself  with  obtaining  from  the  native 
holders,  by  offering  them  a  remission  of  a  certain  part  of  the 
annual  land  tax,  an  option  on  the  land  at  prices  existing  at 
the  time  of  occupation.    As  the  land,  however,  even  if  not  in 
possession  of  the  government,  was  sure  to  increase  in  value 
almost  entirely  because  of  the  prospective  outlay  by  the  gov- 
ernment, an  official  memorial  of  April,  1898,  suggested  that  no 
future  transfer  of  land  should  })e  permitted  without  the  authori- 
zation of  the  government,  which  should  also  participate  in  the 
profits.     The  id^as  of  the  memorial  were  carried  out  in  the 
famous  land  ordinance  of  1898.    This  provided  that  whenever 
any  plot  of  land  in  the  colony  was  sold,  one-third  of  the  in- 
crease in  its  value,  after  deducting  any  improvements  in  or  on 
the  land  made  by  the  owner,  should  be  paid  to  the  government- 
and  that  in  case  the  land  was  not  sold,  it  should  be  valued 
every  twenty-five  years  and  one-third  of  any  increase  in  the 
value  be  similarly  paid  to  the  government.    The  first  was  called 
the  direct  increment  tax  (direkte  Zuwachssteuer),  the  second 
the  indirect  increment  tax.^  ' 

.  \?'V\^^?''^°"^^"  ^^  ^^'^^u^hau  is  printed  in  fuU  in  the  first  number 
of  the  Jahrbuch  der  Bodenreform,  lOOo,  p.  66.  A  thorough  study  of  the 
entire  naatter  is  made  by  Dr.  W.  Schrammler  in  two  articles:  "Die  Land- 
pohtik  im  Kiautschougebiet/'  and  "Die  Steuer-polit ik  im  Kiautschouge- 
biet,    in  the  same  periodical,  vol.  xvii.  (191 1),  pp.  1-62,  and  vol.  viii  (1912) 


RECENT  REFORMS  IN  TAXATION 


507 


Neither  the  official  who  was  primarily  responsible  for  the 
plan  nor  the  admiral  who  put  it  in  force  was  acquainted  with 
the  theories  of  either  John  Stuart  Mill  or  Henry  George. 
The  measure  was  a  purely  practical  one,  and  was  designed 
not  so  much  to  secure  fiscal  results  as  to  prevent  speculation 
on  the  part  of  the  Chinese  and  the  acquisition  of  the  best  land 
by  private  individuals.  In  fact,  the  yield  of  the  tax  was  negli- 
gible, the  greatest  revenue,  secured  in  1901-02  amounting  to 
only  $2,004.  On  the  other  hand,  since  the  land  was  sold  only 
to  those  who  guaranteed  to  build  at  once,  the  speculator  was 
effectually  discouraged. 

The  Kiauchau  experiment  at  once  attracted  the  attention 
of  the  land  reformers  in  Germany.  The  German  Land  Reform 
League  petitioned  the  government  to  extend  the  principle  to 
the  other  German  colonies.^  At  the  Colonial  Congress  of 
1902  in  Berlin  the  success  of  the  scheme  was  emphasized,  and 
as  a  result  the  possibility  of  applying  the  plan  within  Germany 
itself  began  to  be  discussed  in  the  press. 

The  situation  in  Germany  was  peculiar.  The  cities  were 
growing  with  a  rapidity  exceeded  perhaps  nowhere  in  the 
world,  and  there  was  accordingly  great  opportunity  for  specula- 
tive activity.  The  German  tax  system,  moreover,  played  pecul- 
iarly into  the  hands  of  the  speculators.  In  the  first  place, 
although  a  few  cities  practise  the  system  of  special  assessments 
(Beitrdge),  they  are  in  most  cases  levied,  not  as  in  the  United 
States  when  the  improvements  are  made,  but  only  when  the 
building  is  erected.  There  is  thus  every  inducement  to  keep 
the  land  idle  as  long  as  possible.  Secondly,  the  land  tax  is 
not  assessed  on  the  selling  value  of  the  land,  as  in  the  United 
States,  but  on  its  assumed  produce  or  yield.  Moreover,  the 
calculation  of  the  estimated  yield  of  the  land  used  for  agricul- 
tural purposes  is  revised  only  at  long  intervals,  in  Prussia,  e.g. 
every  fifteen  years.  As,  therefore,  the  towns  rapidly  encroach 
upon  the  agricultural  suburbs,  the  land  continues  for  a  long 
time  to  be  assessed,  notwithstanding  its  enormous  rise  in  value, 
according  to  its  assumed  produce  as  so-called  ''potato  land." 
The  result,  of  course,  is  to  offer  every  mducement  to  the  specu- 
lator to  keep  land  out  of  use.     As  a  consequence,  German 

pp.  1-68.    Here  will  also  be  found  a  reprint  of  the  memorial  or  Denkschrift 
uber  Land  und  Steuerwesen. 

» The  German  Land  Reform  League  issued  Zur  Landfrage  in  den  Kolon- 
ien,  1899;  and  Kamerun  oder  Kiautschou,  1900 


508 


ESSAYS  IN  TAXATION 


1.1 


f 

J 


' 


1)1 


I  ( 


towns  especially  those  of  moderate  size,  have  been  confronted 
by  a  housing  problem  (WohnungsnoO,  such  as  is  found  nowhere 
else  m  the  civilized  world.  For  in  England  the  cities  have 
not  grown  at  quite  so  rapid  a  pace,  and  in  the  United  States 
the  practice  of  assessing  the  real  property  tax,  on  the  basis  of 
actual  se  hng  value  coupled  with  the  system  of  special  assess- 
ments, which  imposes  a  heavy  burden  on  the  land  before  the 
building  improvements  are  made,  effectually  prevents  the 
German  abuses.  In  Germany,  therefore,  since  the  beginning  of 
the  twentieth  century  a  great  literature  has  arisen  on  the  hou.^ing 
problem  as  connected  with  the  fiscal  question.^ 

The  reform  movement  assumed  two  forms.  The  first  was 
to  introduce  a  tax  on  the  selling  value  of  real  estate  (Steuer- 
nachdern  gememen  Wert  or  Besitzsteuer) ,  either  in  place  of  the 
existing  tax  on  assumed  produce  or  in  addition  to  it.  In  a  few 
cities  such  a  tax  has  now  been  introduced,  although  at  a  far 
lower  rate  than  is  customary  in  American  cities  and  .vith 
correspondingly  less  effect  in  removing  the  evils  of  the  situa- 

The  second  phase  of  the  reform  was  the  introduction  of 
a  tax  on  unearned  increment,  based  on  the  Kiauchau  experiment 
discussed  above.    The  first  city  to  introduce  the  increment-value 
tax  was  Frankfort  a.  M.  which  initiated  the  system  in  1904.    In 
the  following  year  Cologne  and  Gelsenkirchen,  and  in  1906  Dort- 
mund  and  Essen  adopted  the  scheme.     From  that  time  on 
the  movement  spread  rapidly  throughout  Germanv:  by  April,' 
1910,    the   increment-value    tax   was    found    in   about   4  500 
cities  and  towns,   including   about   one-fourth  of   the  entire 
population  of  the   German  empire.     The  tax  varied  in  its 
details  from  place  to  place,  but  the  fundamental  principles 

TL'^^'T^r/r^'f;    ^'  '^''''  '^^^'^'^  '^^^'  have  now 
features  '^'''^^  '*  '^"  '^^^^  ^^  ^^"  attention  to  their  chief 

;  Compare  Paul  Voigt,  Grundrente  nnd  Wohnungsjrage  in  Berlin  und 
semen  VororteniJona,  1901);  Adolf  Weber,  Ueber  BodenreZ  undBodm 

fraoe  Ina'  l^U-  r  "Z^^'^'^l^r  "^"^^^^^^^  '''''^'  ^^"^  ^^'^  Wohnungs- 
lcS)7V  O  r  .  •;  ^^^^'°^„M^«^^>l^lt-  Die  stadtische  Bodenfmqe  (Gottingen- 
1907),  O.  Gutzeit,  Die  Bodenreform  (Leipzig  1907V  T  von  Rrii!  n  ' 
Naiional-Oekonornie  des  Boden  (Berlin,   lS)8) ;  Z^i  Web"     S  ^^ 


RECENT  REFORMS  IN  TAXATION 


509 


The  increased  value  on  which  the  tax  was  applied  was  gen- 
erally interpreted  to  mean  the  difference  between  the  last  pur- 
chase price  and  the  present  selling  price.  Allowance  was  almost 
universally  made  for  expenditures  incurred  in  the  improvement 
of  the  land  and  for  the  cost  of  new  buildings  or  rebuilding. 
Allowance  was  also  usually  made  for  a  sum  equivalent  to  the 
stamp  tax,  the  transfer  tax  and  other  fees  connected  with  the 
change  of  ownership.  A  further  sum  was  usually  allowed  rep- 
resenting  the  interest  (not  compounded)  from  the  time  of  the  last 
sale  to  the  present  transfer.  In  some  places  these  _sums,  es- 
pecially the  cost  of  improvements7~were  subtracted  from  the 
selling  price,  while  in  others  they  were  added  to  the  purchase 
price.  In  some  places  again,  where  certain  parcels  of  an  entire 
tract  owned  bj'  a  single  individual  had  been  sold  at  a  loss, 
allowance  was  made  therefor,  provided  that  the  losing  sales  oc- 
curred at  the  same  time  as  those  that  were  profitable,  or  within 
a  limited  period  previous  thereto.  In  most  cases,  again,  slight 
increases  of  value  were  exempted.  The  tax  applied  in  general 
only  to  increments  of  value  exceeding  ten  per  cent;  sometimes, 
however,  it  began  only  at  twenty  per  cent,  and  in  Frankfort  only 
at  thirty  per  cent.  The  rates  were  almost  always  progressive, 
but  the  minima  and  maxima  varied  greatly.  Thus  in  Ham- 
burg the  rates  were  graduated  from  one  to  twelve  and  one-half 
per  cent,  while  in  Cologne  they  rose  from  ten  to  twenty-five 
per  cent.  In  Gelsenkirchen  the  maximum  was  thirty  per  cent. 
The  scale  of  progression,  moreover,  varied  considerably,  from  one 
per  cent  for  each  ten-per-cent  increase  of  value,  as  in  Cologne, 
up  to  ten  per  cent  for  each  five-per-cent  increavse  in  value  in 
some  other  cities.  The  maximum  limits  varied  still  more 
widely:  in  Paderborn,  for  instance,  the  highest  rate  (fifteen 
per  cent)  was  imposed  in  case  of  an  increase  of  value  of  over 
seventy-five  per  cent,  while  in  other  towns  the  increase  of 
value  taken  into  account  in  determining  the  rate  was  con- 
siderably higher,  rising  in  some  cases  to  two  hundred  per  cent. 
The  highest  tax  imposed  anywhere  was  thirty  per  cent  where 
the  increase  of  value  was  over  one  hundred  and  fifty-five  per 
cent. 

Owing  to  the  short  time  that  these  local  taxes  had  been  in 
force  the  fiscal  results  were  not  pronounced.  But  the  taxes 
approved  themselves  on  the  whole  to  the  authorities  and  the 
system  was  ])eginning  to  spread  even  to  the  state  governments. 
A  bill  for  a  state  increment-value  tiix  \vas  introduced  in  Bavaria 


It( 


510 


ESSAYS  IN  TAXATION 


V    t 


/ 


H'. 


in  1909,  and  in  January,  1910,  the  first  state  increment-value 
tax  was  established  in  Lippe-Detmold.^ 

The  project  of  an  imperial  tax  on  increment  value  was  first 
suggested  by  Dr.  Wilms,  mayor  of  Posen,  in  a  speech  in  the 
Prussian  House  of  Lords  on  March  28,  1908.    The  scheme  was 
at  once  taken  up;  a  few  weeks  later  it  enlisted  the  support 
of  Professor  Adolf  Wagner  in  a  speech  at  a  convention  of  land 
reformers.    A  heated  discussion  thereupon  ensued  throughout 
the  country.    The  project  was  vigorously  opposed  by  the  various 
local  mterests  that  had  now  come  to  consider  the  unearned 
increment  as  a  valuable  object  of  local  taxation.    The  advocates 
of  the  scheme  had,  however,  no  difficulty  in  sho\\ing  tliat  if 
site  values  were  the  result  of  the  numbers  and  prosperity  of 
the  population,  the  empire  as  a  whole  also  contributed  to  this 
prosperity  and  to  these  numbers;  and  that  in  reality  no  legiti- 
mate  stopping  place   between   locality   and   empire   existed. 
Ihe  most  that  the  supporters  of  the  project  conceded  was  that 
the  localities  had  an  undoubted  right  to  a  large  share  of  the 
proceeds.^ 

The  movement  in  favor  of  the  scheme  became  so  strong 
that  m  May,  1908,  the  finance  committee  of  the  Reichstag 
resolved  to  ask  the  government  to  introduce  without  delay  a 
bill  for  an  imperial  unearned  increment  tax.  Secretary  Sydow 
stated,  however,  that  he  must  first  submit  the  whole  project 
to  the  opinion  of  experts.  The  judgment  of  these  officials  was 
on  the  whole  adverse,  and  a  memorial  was  submitted  in  opposi- 
tion. Notwithstanding  this  adverse  judgment,  a  bill  was  in- 
troduced and  passed  in  a  second  reading  on  June  23d.  A  few 
weeks  later,  however,  it  was  decided  to  postpone  the  enactment 

!  ^^■'  z,-?,^^?'^®  staatliche  Zuwachssteuer,"  in  Jahrbuch  der  Bodenreform 
vol.  VI.  (1910),  pp.  41>-57.  ' 

2  The  most  important  of  the  works  in  favor  of  the  scheme  were:  Dr 
Wilms,  LHe  Reichs-Zuwachssteuer  (1909);  A.  Pohhnan-Hohenaspe,  Der 
enie  Schntt  zu  gesunden  Finanzen  (Leipzig,  1909);  A.  Damaschke,  Zum 
Kampfe  urn  die  Reichs-Zuwachssteuer  (Berlin.  1910).  Cf.  also  a  series  of 
seven  articles  written  from  the  point  of  view  of  each  of  the  various  economic 
interest,  such  as  agnculture,  industry,  commerce,  building  trades,  etc.,  in  the 
Jahrbuch  der  Bodenreform  vol.  vi.  (1910),  pp.  161-229.  The  chief  arguments 
m  opposition  ^-ere  expressed  by  Dr.  Strutz,  Betrachtunqen  zur  Reichs- 
Zuwachssteuer  (Berlin,  1910);  and  Kari  Diehl,  "Zur  Kritik  der  Reichs- 
Zuwachssteuer,"  in  Conrad's  Jahrbucher,  vol.  40  (1910),  p.  289  et  sea 

» This  Denkschrift  betreffend  die  reichsgesetzliche  Einfuhrung  einer  Wert- 
Zuwachss^  fur  Immohilien  is  printed  in  the  Jahrbuch  der  Bodenreform 


RECENT  REFORMS  IN  TAXATION 


511 


of  the  law,  and  for  the  time  being  a  stamp  tax  was  substituted. 
Nevertheless,  the  law  contained  a  clause  that  an  imperial  un- 
earned increment  tax,  designed  to  yield  twenty  millions  of 
marks,  should  be  introduced,  if  practicable,  by  April,  1911,  and 
surely  not  later  than  April,  1912. 

The  prospect  of  an  imperial  tax  evoked  all  manner  of 
schemes  on  the  part  of  the  landowners,  designed  to  frustrate 
or  to  evade  the  projected  legislation.  This,  together  with  the 
urgency  of  the  fiscal  situation,  decided  the  government  to  ex- 
pedite matters,  and  a  bill  was  introduced  in  April,  1910.  It  was 
referred  to  a  committee  and,  after  considerable  discussion  be- 
came law  in  February,  1911,  but  with  retroactive  force  to  De- 
cember 31,  1910.^ 

The  new  imperial  tax  replaces  all  the  former  state  and  munici- 
pal taxes  of  the  same  kind.  The  law  provides  that,  in  the  case  of 
the  transfer  of  any  property  interest  in  real  estate,  a  tax  shall  be 
levied  on  the  increase  of  value  which  occurs  without  the  activity 
of  the  owner.  In  this  statement  two  points  are  to  be  noticed: 
the  tax  is  imposed  not  simply  on  land  values,  as  in  England,  but 
on  real  estate,  thus  raising  the  question  of  how  improvements  on 
land  are  to  be  treated.  In  the  second  place,  the  words  "with- 
out the  activity  of  the  owner  "  raise  the  question  how  far  the 
increase  of  values  is  due,  on  the  one  hand,  to  the  growth  of  the 
conmaunity  or,  on  the  other,  to  the  efforts  of  the  landholder.   The 

^  The  original  bill  with  the  amendments  of  the  Commission,  and  of  the 
first  and  second  reading,  is  printed  in  the  Jahrbuch  fiir  Bodenreform,  vol. 
vi.  (1910),  p.  114  et  seq.  The  law  can  most  conveniently  be  consulted  in 
Finanz-Archiv,  vol.  xxviii.  (1911),  p.  817  et  seq.  Cf.  also  the  Jahrbuch  fur 
Bodenreform,  vol.  vii.  (1911),  pp.  62-85.  The  annotated  law  has  been 
pubUshed  in  various  annotated  editions.  The  best  perhaps,  is  Dr.  H.  Koppe, 
Das  Zuwachssteuer-Gesetz  von  Feb.  14,  1911,  mit  den  Ausfuhrungs-Bestim- 
mungen  des  Bundesrats  Preussens,  Bayerns  und  Sachsens  (Munich  and  Berlin, 
1911).  Good  discussions  of  the  new  law  are  those  of  Dr.  G.  Strutz,  "Die 
Reichs-Zuwachssteuer  vom  sozial-politischen  Standpunkte,"  in  Braun's 
Annalen  fur  Sozial  Politik  und  Gesetzgebung,  vol.  1  (1911),  no.  1;  and  of 
M.  Weyermann,  "Die  Reichszuwachssteuer  vom  sozialpolitischen  Gesicht- 
spunkte,"  in  SchmoUer's  Jahrbuch  fiir  Gesetzgebung  Verwaltung  und 
Volkswirtschaft,  vol.  36  (1912),  pp.  283-303.  Cf.  also  Professor  Gustav 
Cohn,  "The  Taxation  of  Unearned  Increment  in  Germany,"  in  The  British 
Economic  Journal,  vol.  xxi.  (1911),  p.  212  et  seq.;  and  R.  C.  Brooks,  "The 
German  Imperial  Tax  on  the  Unearned  Increment,"  in  Quarterly  Journal 
of  Economics,  vol.  xxv.  (1911),  p.  682  et  seq.,  with  a  translation  of  the  law 
on  pp.  751-765.  In  E.  Peisker,  Reichswertzuwachssteuer.  Das  geltende 
Recht  und  die  Ziele  seiner  Reform,  Berlin,  1912,  will  be  found  a  twelve  page 
bibliography  of  the  topic. 


i 


512 


ESSAYS  IN  TAXATION 


llfi 


small  interests  of  the  lower  middle  classes  are  exempted:  the  tax 
does  not  apply  to  any  interest  in  real  estate  of  less  than  20  000 
marks  m  the  case  of  improved  property,  or  of  less  than  5,'ooO 
marks  m  the  case  of  vacant  land;  provided  always,  that  neither 
the  owner  nor  Ins  wife  had  more  than  2,000  n^rks  income  in 
the  precedmg  year,  and  provided  also  that  neither  of  them  was 
engaged  m  the  real-estate  business.    Other  exemptions  include 
associations  for  buil.Ung  purposes,  for  colonization  and  the 
Ike,  provided  that  their  profits  are  limited  to  four  per  cent    Cer- 
tain transactions    moreover,  are  not  liable  to  tax,  such  as 
transfers  by  mhentance,  under  certain  conditions  or  b;  marriage 
settlement,  or  for  the  purpose  of  agricultural  improvementf 

Ti^  tt  wlT"^  °^.  ^'^'^'y  ""'^^  "™°"g  «<^a"ered  strip^ 
of  real  estate  (Flurvereimgung  and   Umlegung).     In  order  to 

meet  a  common  method  of  evading  the  tax,  it  is  provided  that 
any    ransfer  of  securities  of  a  corporation  ;hose  L4ts  cons^ 
of  real  estate  should  be  considered  a  traa.fer  of  the  land  itself 
Ihe  increment  of  value  subject  to  tax  is  defined  as  the  differ- 
ence between  the  purchase  price  and  the  soiling  price.    To  the 
madrn^'  """"''  ^"^r^^'  '^'  ^°"°^""S  •■additions  are  to  be 
TcaJsitin     iTir  '"k   "^  '"P'TT^^S  the  original  cost  of 
acquisition     If  it  can  be  proved  that  the  transfer  fees  were 
more  than  this  sum  the  actual  cost  may  be  substituted.    (2)  The 
sewersl  IP^^^^  ^^^f^^^nts  for  opening  streets,  constructing 
sewers,  ete.,  together  with  interest  at  four  per  cent  for  not  more 
than  fifteen  years.    (3)  If  the  purchase  took  place  through  tte 
forecU^ure  of  a  mortgage,  the  amount  of  the  mortgage  is  to 
be  added  to  the  equity.    (4)  All  outlays  for  permfnfnt  ii^ 

where  the  owners  are  engaged  in  the  building  industry,  fifteen  per 
cent  of  such  outlay.  (5)  An  additional  amount  equd  to  two  and 
one-half  per  cent  in  the  case  of  certain  small  properties.' 

iwl'''^  compUcated  item  is  clearly  explained  on  p.  694  of  the  essav  of 
renamed  unimproved,  these  additions  .^^X:;Xl^'^^ 


RECENT  REFORMS  IN  TAXATION 


513 


It  was  in  connection  with  the  question  of  improvements  that 
the  chief  discussion  took  place.    In  some  of  the  municipal  taxes, 
as  we  have  seen,  the  cost  of  improvements  was  subtracted  from 
the  selling  price,  while  in  others  it  was  added  to  the  purchase 
price.    In  many  cases  this  did  not  make  much  difference,  but 
in  the  new  imperial  tax  the  rates,  as  we  shall  see  in  a  moment, 
are  based  on  the  percentages  of  the  unearned  increment  to  the 
purchase  price  of  the  property  plus  the  cost  of  permanent 
improvements  and  the  other  additions.     It  is  obvious  that  if 
the  value  of  the  improvements  is  added  to  the  cost  price,  the 
percentage  of  increment,  and  therefore  the  tax  rate,  will  be  much 
less  than  would  otherwise  be  the  case.  In  the  original  draft  of  the 
bill  the  value  of  permanent  improvements  was  subtracted  from 
the  selling  price  instead  of  being  added  to  the  purchase  price. 
The  advocates  of  this  provision  supported  it  on  the  ground 
that  the  increase  of  value  was  almost  always  due  to  a  change  in 
the  value  of  land  rather  than  in  the  value  of  improvements. 
Moreover,  it  must  be  remembered  that  the  German  law  pays 
no  attention  to  depreciation  in  the  value  of  buildings.     It  is 
perfectly  conceivable  that  where  a  fairly  good  house  is  sold  a  long 
time  after  its  purchase,  when  it  has  become  greatly  in  need  of 
repair,  the  increase  in  the  value  of  the  land  might  be  swallowed 
up  by  the  decrease  in  the  value  of  the  house.    In  such  a  case  to 
permit  the  owner  to  add  the  value  of  the  improvement  to  the 
cost  price  is  virtually  to  exempt  him  from  the  tax,  notwithstand- 
ing the  rise  in  land  values.    Nevertheless,  in  the  contest  that 
ensued,  the  landowners  succeeded  in  securing  a  change  in  the 
bill,  and  the  law,  as  adopted,  permits  the  owner  to  include  the 
cost  of  improvements  in  estimating  the  purchase  price.    This, 
it  is  obvious,  greatly  diminishes  the  rigor  of  the  tax. 

From  the  selling  price,  on  the  other  hand,  it  is  permissible 
to  deduct  first  the  costs  of  the  sale,  including  fees;  second,  a 
compensation  for  any  diminution  of  value  that  may  occur  after 
Jan.  10,  1911;  and  third,  the  amount  by  which  the  annual 
yield  on  the  land,  for  a  period  of  not  more  than  fifteen  years, 
falls  short  of  three  per  cent  on  the  original  purchase  price,  includ- 
ing the  improvements.     This  practically  frees  the  holder  of 

p.  694).  The  object  of  these  provisions  is  three-fold;  first,  to  favor  agricul- 
tural land,  and  especially  vineyard  land,  where  the  value  of  the  land  is  in 
part  due  to  the  efforts  of  the  cultivator;  second,  to  increase  the  tax  on  land 
that  is  no  longer  used  for  agricultural  purposes  and  is  "ripe  "  for  building; 
third,  to  compensate  the  landholders  for  a  rise  of  values  which  may  be  in 
part  due  to  a  decrease  in  the  purchasing  power  of  money. 


i 


\ 


514 


ESSAYS  IN  TAXATION 


I 


vacant  land  from  any  tax  unless  the  annual  increment  of  value 
is  more  than  four  or  five  per  cent. 

An  important  section  of  the  law  provides  that  if  the  last 
transfer  took  place  more  than  forty  years  previously,  the  value 
of  the  property  at  a  period  of  forty  years  before  the  transfer  is 
to  be  taken  as  the  purchase  price,  unless  it  can  be  shown  that  the 
property  conmianded  a  higher  value  before  that  period.    Fur- 
thermore, if  the  last  transfer  took  place  before  the  year  1885  its 
value  at  that  date  is  to  be  taken  as  the  purchase  price. 
^The  rate  of  the  tax  depends,  as  stated  above,  on  the  percentage 
of  the  unearned  increment  to  the  purchase  price  of  the  property 
plus  the  cost  of  permanent  improvements  and  the  other  legal 
additions^  Where  the  increment  of  value  is  ten  per  cent  or  less,"* 
the  tax  is  ten  per  cent  of  the  increment.    The  rate  increases  one 
per  cent  for  every  additional  twenty  per  cent  (and  later  ten 
per  cent)  of  increment  of  value  until  it  reaches  a  rate  of  thirty 
per  cent  on  all  increments  of  value  of  290  per  cent.    A  diminu- 
tion of  one  per  cent  on  the  tax,  however,  is  permitted  for  every 
year  since  the  last  sale;  and  where  the  last  sale  took  place  before 
January  1,  1900,  this  diminution  is  allowed  at  the  rate  of  one 
and  one-half  per  cent  annually  up  to  January  1,  1911. 

The  tax  was  to  be  assessed  by  the  state  authorities  in  each 
commonwealth,  but  under  the  general  supervision  of  the  impe- 
rial officials.  Of  the  proceeds  fifty  per  cent  went  to  the  empire 
and  forty  per  cent  to  the  locality,  the  remaining  ten  per  cent 
being  reserved  by  each  state  to  cover  the  cost  of  collection.  The 
localities,  however,  were  permitted  to  levy  additions  to  the  tax, 
with  two  restrictions:  they  could  not  impose  more  than  double 
their  own  share,  and  the  total  tax  imposed  in  any  individual 
case  could  not  exceed  thirty  per  cent  of  the  increment  value.^ 

Contrasting  the  German  law  with  its  English  analogue,  we 
notice  not  only  its  great  complication,  but  the  presence,  in  the 
endeavor  to  be  just  to  all  interests,  of  many  awkward  provisions. 
The  diiferences  may  be  summarized  as  follows:  the  tax  is  not 
one  on  pure  land  values;  second,  no  allowance  is  made  for  depre- 

1  In  1913  the  imperial  land-increment  tax  was  converted  into  a  general 
property-increment  tax  through  the  Vertmgenszuivachssteiter  as  a  part  of  the 
new  Besitzstey£T.  The  proceeds  of  the  land-increment  taxes  henceforth 
reverted  to  the  states  and  localities.  The  principle  of  the  property-in- 
crement tax  was  again  accepted  in  the  Reichskricgssteuer  of  1916  and 
in  the  extraordinary  War  Taxes  {Kriegsabgaben  vom  Vermogenszuwachse)  of 
1918  and  1919. 


RECENT  REFORMS  IN  TAXATION 


515 


ciation  in  the  value  of  improvements;  third,  the  concessions  to 
the  landowners  mentioned  above  will  seriously  reduce  the  fiscal 
importance  of  the  tax;  and  fourth,  many  of  the  provisions  are 
so  complex  that  they  will  undoubtedly  create  difficulty.  With 
all  its  defects,  however,  the  law  is  a  striking  example  of  progress 
in  the  conception  of  fiscal  justice,  and  an  evidence  of  the  in- 
fluence of  modern  changes  in  economic  conditions  on  the  forms 
of  taxation. 

If  we  compare  the  German  reforms  as  a  whole  with  those  in 
Great  Britain  we  notice  some  striking  analogies  accompanied 
by  no  less  striking  dissimilarities.    Both  coimtries  have  relied 
for  their  increasing  revenues  to  a  large  extent  on  indirect  taxes. 
Both   countries  have  developed  and  perfected  their  income 
tax.    Both  have  introduced  somewhat  similar  land  taxes.    On 
the  other  hand,  while  England  has  further  developed  its  in- 
heritance tax,  the  German  effort  in  the  same  direction  was 
frustrated.    Per  contra,  however,  the  adjustment  of  the  relations 
between  local  and  central  finance  has  made  more  progress  in 
Germany  than  in  England.    In  the  case  of  the  taxes  on  transac- 
tions and  consumption  the  British  system  is  on  the  whole 
superior  to  the  German.    The  British  income  tax,  again,  not  only 
compares  favorably  with  the  German  system  in  simplicity  of 
administration  and  in  fiscal  results,  but  is  more  nearly  in  accord- 
ance with  the  modern  theories  of  ability  to  pay.    In  the  matter  of 
inheritance  taxation  Great  Britain  is  far  in  advance  of  Germany. 
The  British  land  taxes,  finally,  are  more  comprehensive  than  the 
German,  and  the  increment-value  tax  in  particular  is  both  more 
simple  and  more  in  agreement  with  correct  theory.    It  is  only 
in  the  single  point  of  adjustment  between  local  and  imperial 
taxation  or,  as  in  Germany  between  local,  state  and  imperial 
taxation  that  the  British  system  is  inferior  to  the  German. 
Taking  it  all  in  all,  therefore,  it  may  be  said  that  while  the 
German  reforms  constitute  an  undeniable  step  in  advance, 
many  further  steps  must  be  taken  before  the  German  fiscal 
system  can  be  declared  to  be  on  a  level  with  the  English.     It 
is  not  at  all  improbable  that  the  coming  years  have  in  store  for 
Germany  an  iinprovement  in  the  methods  of  the  income  tax 
and  the  adoption  of  a  revised  and  modernized  inheritance 
tax.^ 

»This  prediction  has  been  verified  by  the  readjustment  of  German 
taxation  m  1920,  which  brought  about  the  revolution  in  the  relations  of 
federal  and  state  taxation  referred  to  on  p.  389,  supra. 


I 


I 


I' 


516 


ESSAYS  IN  TAXATION 
V.  Australasia 


The  recent  tax  reforms  in  Australia  and  in  New  Zealand  have 
effected  no  dramatic  changes  like  those  of  1909-10  in  England 
and  Germany.  The  movement  in  the  antipodes  has  been  a 
continuous  progress  on  the  lines  discussed  in  the  case  of  New 
Zealand  in  the  last  chapter.  The  year  1910,  however,  is  marked 
not  only  by  the  extension  to  the  Commonwealth  of  Austraha  of 
certain  taxes  previously  reserved  for  the  separate  states,  but 
also  by  some  significant  changes  in  the  laws  of  the  states  them- 
selves. The  Australasian  movement  may  bediscussed  under  four 
heads:  (1)  the  land  taxes  in  the  states  and  the  conmionwealth; 
(2)  the  exemption  of  improvements  in  the  localities;  (3)  the 
spread  of  the  income  tax;  and  (4)  the  relation  between  local  and 
general  finance. 

The  land  taxes  in  Australasia  were  originally  imposed  partly 
for  revenue  purposes,  but  chiefly  in  order  to  discourage  the 
formation  of  large  landed  estates.^  The  earliest  law  of  this 
kind  was  enacted  in  Victoria  in  1877.  It  provided  for  a  tax  on 
rural  lands  over  640  acres  in  extent  and  over  £2,500  in  value. 
It  was  followed  by  the  South  Australian  law  of  1884,  with  the 
introduction  of  the  progressive  principle  in  1890.^    In  both 

1  The  best  account  of  the  Australasian  land  taxes  will  be  found  in  The 
Financial  Yearbook  of  the  Commonwealth  of  Australia,  1901-10,  by  G.  IL 
Knibbs  (Melbourne,  1911);  especially  in  sees,  vi.,  xix.  and  xx.;  and  in  the 
New  Zealand  Official  Yearbook,  1911,  by  M.  Frazer,  Wellington,  1911.  The 
British  Blue  Books  on  the  land  taxes  of  Australia  and  New  Zealand,  pub- 
lished in  1906-07,  were  reprinted  with  additions  in  1909,  under  the  title  Tax- 
ation of  Land,  etc.  Papers  bearing  on  land  taxes  and  on  income  taxes,  etc.,  in 
certain  foreign  countries,  and  on  the  working  of  taxation  of  site  values  in  certain 
cities  of  the  United  States  and  in  British  colonies,  together  with  extracts  relative 
to  land  taxation  and  land  valmtion  from  reports  of  Royal  Commissions  and 
Parliamentary  Committees.  Cd.  4750.  A  synopsis  of  the  Australian  systems 
up  to  1908  will  be  found  in  Seligman,  Progressive  Taxation,  2d  ed.,  1908, 
p.  94  et  seq.  Cf.  also  W.  Pember  Reeves,  State  Experiments  in  Australia  and 
New  Zealand,  1902,  vol.  i.,  pp.  251-268,  and  a  later  article  by  the  same 
author,  "Land  Taxes  in  Australasia,"  Economic  Journal,  vol.  xxi.  (1911), 
p.  513  et  seq.  This  article  sums  up  his  conclusions  pubhshed  in  the  Blue 
Book  mentioned  above. 

2  In  Victoria  the  rate  was  1 3^  per  cent  of  the  capital  value  of  the  land. 
The  land  was,  however,  valued  on  a  pastoral  basis,  according  to  sheep- 
raising  capacity,  at  from  £1  to  £4  per  acre.  This,  of  course,  meant  an  in- 
significant tax.  In  South  Australia  the  law  of  1890,  still  in  force,  imposes  a 
tax  of  one  halfpenny  in  the  pound  on  the  unimproved  value  of  land  and 
over  £240  in  value,  with  an  additional  halfpenny  per  pound  for  any  excess 
over  £5,000,  and  with  20  per  cent  additional  for  absentees,  who  are  defined 
as  those  who  have  been  away  from  the  state  for  more  than  one  year. 


RECENT  REFORMS  IN  TAXATION 


517 


these  cases,  however,  the  taxes  were  light  and  produced  no 
appreciable  effect  on  the  size  of  the  estates.  In  the  other  Aus- 
tralian state  in  which  the  system  was  introduced— namely,  New 
South  Wales,  the  object  was  primarily  fiscal,  the  law  of  1895 
imposing  a  tax  of  one  per  cent  on  all  unimproved  land. 

In  New  Zealand  a  more  vigorous  policy  was  inaugurated 
as  early  as  1891,  as  has  been  explained  in  the  last  chapter. 
It  will  be  remembered  that  the  law  adopted  in  that  year  pro- 
vided for  a  tax  of  one  penny  in  the  pound  on  all  land  with  an 
exemption  of  improvements  up  to  £3,000;  and  in  the  case  of 
land  of  the  value  of  at  least  £5,000  an  additional  graduated 
tax  on  the  value  of  the  land,  exclusive  of  improvements  and 
without  deduction  for  mortgages,  the  rate  rising  in  fourteen 
classes  until  it  reached  l^d.  in  the  pound  (changed  to  2d.  in 
the  pound  in  1893),  when  the  land  was  worth  £210,000.    This 
made  the  maximum  rate  on  the  largest  estates  3d.  in  the  pound. 
This  graduated  land  tax,  however,  proved  ineffective  from 
both  the  fiscal  and  social  point  of  view.     Its  yield  had  in- 
creased only  from  £71,000  in  1893  to  £79,000  in  1903,  not- 
withstanding a  considerable  rise  in  the  value  of  land.     The 
effect  of  the  law  in  cutting  up  large  estates  was  correspondingly 
slight;  it  was,  indeed,  almost  imperceptible. 
^  It  was  consequently  decided  to  increase  the  scale  of  gradua- 
tion; and  in  1903  an  additional  tax  over  and  above  the  ordinary 
penny  rate  was  imposed  on  unimproved  land,  the  rate  being 
graduated  from  one-sixteenth  of  a  penny  on  land  values  of 
from  £5,000-7,000  and  reaching  Sd.  (one  and  one-fourth  per 
cent)  on  land  values  of  £210,000,  with  fifty  per  cent  additional 
for  absentees!     This  change,  together  with  an  improvement 
in  the  machinery  of  assessment  increased  the  yield  in  the  next 
three  years  (up  to  1906)  about  thirty  per  cent.^ 

1  The  exact  figures  as  presented  in  the  New  Zealand  Official  Year  Book, 
1910,  p.  662,  are  as  follows) : 


YEAR 

ORDINARY 
LAND   TAX 

GRADUATED 
LAND  TAX 

absentees' 

TAX 

1900-01 

£222,353 
233,545 
217,307 
232,774 
254,726 
277,144 

£   71,406 

78,214 
77,832 
98,681 
94,703 
104,949 

£   825 
1,076 
923 
3,536 
3,425 
3,663 

1901-02 

1902-03 

1903-04 

1904-05 

1905-06 

r     ' 


518 


ESSAYS  W  TAXATION 


RECENT  REFORMS  IN  TAXATION 


519 


^ 


r    * 


But  while  the  fiscal  results  were  gratifying,  the  government 
was  not  satisfied  with  the  effect  of  the  law  in  breaking  up 
large  estates.  The  statistics  show  that  while  there  had  been, 
up  to  1906,  a  diminution  in  the  estates  of  over  fifty  thousand 
acres,  and  a  somewhat  smaller  decrease  in  the  number  of  es- 
tates between  twenty  and  fifty  thousand  acres,  there  had  been 
virtually  no  falling  off  in  estates  between  ten  and  twenty  thou- 
sand acres  and  an  actual  increase  in  those  between  five  and 
ten  thousand  acres. ^ 

On  the  other  hand,  the  increase  in  the  number  of  the  very 
small  plots  was  largely  due  to  laws  independent  of  the  tax 
system,  especially  the  scheme  inaugurated  in  1892,  whereby 
the  government  purchased  large  estates  in  order  to  lease  them 
in  small  sections  to  intending  farmers,  as  well  as  the  plan  by 
virtue  of  which  a  group  of  settlers  might  form  a  land  settle- 
ment association,  purchase  an  estate  by  means  of  debentures 
issued  through  a  public  trustee  under  the  guaranty  of  the 
government  and  then  subdivide  it  into  plots  of  not  more  than 
500  acres. 

Accordingly  in  1907  the  government  decided  to  increase 
substantially  the  rate  of  the  tax  in  the  case  of  land  values  over 
£40,000,  so  that  the  additional  graduated  land  tax  now  reached 
two  per  cent  at  a  maximum  value  of  £200,000.^  This  change 
led  to  a  considerable  increase  of  the  revenue,  the  yield  of  the 
graduated  tax  almost  doubling  in  four  years,  and  forming  a 

»The  New  Zealand  Official  Yearbook,  1910,  p.  626;  ibid.,  1911,  p.  610, 
gives  the  following  figures,  indicating  the  number  of  farms  of  dififerent 
sizes: 


5- 

100- 

1,000- 

5,000- 

10,000- 

20,000- 

OVER 

YEAR 

100 

1,000 

5,000 

10,000 

20,000 

50,000 

50,000 

TOTAL 

ACRES 

ACRES 

ACRES 

ACRES 

ACRES 

ACRES 

ACRES 

1883 

14,766 

14,267 

1,281 

203 

141 

83 

23 

30,764 

1886 

17,075 

15,471 

1,425 

220 

151 

79 

29 

34,450 

1889 

18,805 

16,743 

1,413 

221 

134 

89 

27 

37,432 

1892 

19,369 

17,538 

1,558 

208 

148 

84 

30 

38,935 

1902 

20,799 

20,316 

2,144 

260 

123 

70 

23 

43,785 

1906 

20,900 

21,269 

2,417 

278 

129 

62 

13 

45,068 

1911 

21,767 

21,924 

2,753 

307 

121 

39 

11 

46,922 

*  The  scale  of  the  additional  taxes  on  unimproved  land  value  over  and 
above  the  ordinary  penny  rate  was  fixed  in  1907  as  in  the  table  printed 
on  the  following  page. 


continually  growing  percentage  of  the  entire  public  revenue.^ 
Even  this,  however,  did  not  satisfy  the  public,  and  it  was 
provided  that,  after  1910,  on  all  land  other  than  that  used 
for  business  premises,  the  graduated  scale  should  be  increased 
by  twenty-five  per  cent.  The  result  is  that  the  total  land  tax 
now  rose  to  three  and  one-half  per  cent  in  the  case  of  residents, 
and  to  six  per  cent  in  the  case  of  absentees.  In  1917,  50%  was 
added  to  the  graduated  land  tax,  increasing  the  old  rate  of  Id- 
7d.  to  a  maximum  of  103/^d.  (4  1/3%)  for  residents,  and  to  14c?. 
(5  4/5%)  for  non-residents.  The  total  land  tax  thus  reached 
5  1/3  and  6  4/5%  respectively.  Whether  these  increased  rates 
will  suffice  to  attain  the  objects  of  the  law  in  greater  measure 
than  has  hitherto  been  the  case,  remains  to  be  seen.  The 
figures  of  land- holding  for  1911,  as  compared  with  those  of 
1906,  show  a  decided  falling  off  in  farms  of  from  20,000  to 
50,000  acres,  but  a  virtual  standstill  at  both  extremes. 

What  may  be  called  the  New  Zealand  system  of  land  value 
taxes,  has  been  spreading  through  other  parts  of  Australasia 
during  the  last  few  years.  In  a  few  cases  indeed  the  system 
is  still  but  slightly  developed.  Thus,  in  South  Australia  where 
the  rates  were  increased  in  1903  and  1905,  the  law  of  1906 


^  The  rates  of  1907  were  as  follows: 

LAND  VALUES 

RATE  (per  £) 

LAND  VALUES 

RATE  (per  £) 

£  5,000-  7,000.  .  . 

7,000-  9,000.  .  . 

9,000-11,000..  . 
11,000-13,000.  .  . 
13,000-15,000.  .  . 
15,000-17,000... 
17,000-20,000.  .  . 

l-16d. 

2-16(i. 

3-16d. 

4-16rf.   . 

5-md. 

6-16rf. 

7-md. 

£20,000-22,500 

22,500-25,000.  .  .. 
25,000-27,500..  .. 
27,500-30,000.  .  .. 
30,000-35,000.  .  .. 
35,000-40,000.  .  .. 

8-16d. 

9-16d. 
10-16d. 
n-16d. 
12-16rf. 
13-16d. 

At  a  valuation  of  £40,000  the  rate  was  8  shillings  per  £100  or  two-thirds 
of  one  per  cent.  For  every  £1,000  additional  value  the  rate  increased  one- 
fifth  of  a  shilling  until  at  £200,000  the  rate  equalled  two  per  cent. 

The  revenue  from  the  land  taxes  was  as  follows: 


TOTAL 

PER  cent 

YEAR 

ORDINARY 

GRADUATED 

absentee's 

LAND 

OF  TOTAL 

LAND  TAX 

TAX 

TAX 

taxes 

REVENUE 

1906-7 

£317,176 

£125,929 

£4,237 

£447,342 

10.49 

1907-8 

346,166 

186,000 

5,680 

537,846 

10.58 

1908-9 

389,844 

209,248 

5,809 

604,901 

13.82 

1909-10 

417,668 

220,044 

4,558 

642,270 

15.13 

1910-11 

416,426 

,  209,493 

2,804 

628,723 

13.00 

n    ' 


■BIBS 


♦ 


1 


'I 
'\ 
.S 


520 


ESSAYS  m  TAXATION 


reverted  to  the  original  rates  of  1896.^  Again,  in  New  South 
Wales,  after  the  passage  of  the  Local  Government  Act  of  1906 
the  operation  of  the  land  taxes  was  to  be  suspended  whenever 
the  shire  or  municipality  should  levy  a  similar  local  rate  of  not 
less  than  one  penny  on  the  pound.  As  such  local  rates  are  now 
levied  almost  everywhere  in  New  South  Wales,  the  revenue  from 
the  state  tax  has  virtually  disappeared.^  Finally,  in  Western 
Australia  where  the  tax  was  introduced  m  1907,  the  rate  is 
only  one  penny  in  the  pound  on  unimproved  land  over  £50 
in  value,  with  a  rebate  of  one-half  the  tax  to  the  owner  of  im- 
proved land. 

The  year  1910,  however,  witnessed  not  only  the  extension  of 
the  land-value  tax  system  to  Tasmania  and  its  increase  in 
Victoria,  but  also  the  adoption  of  the  scheme  by  the  Common- 
wealth proper.  In  the  same  year  there  was  likewise,  as  we  have 
seen,  a  decided  steepening  of  the  grade  in  New  Zealand. 

In  Victoria,  although  the  law  of  1910  imposes  a  rate  of  only 
one  halfpenny  in  the  pound  on  all  land  whose  unimproved 
value  exceeds  £250,^  the  absolute  restriction  on  the  valuation 
of  land  to  £4  as  provided  by  the  law  of  1890  has  been  abolished, 
thus  bringing  about  a  sul^stantial  increase  in  the  taxes  on 
more  valuable  property.  In  Tasmania  an  act  of  1910  levies 
a  progressive  tax  on  land  values  ranging  from  one  penny  to 
twopence  halfpenny  in  the  pound.^ 

Most  important,  however,  was  the  adoption  of  a  federal 

^  In  1903  the  land  tax  was  fixed  at  three  farthings  in  the  pound,  the 
additional  tax  on  rental  values  over  £5,000  remaining  at  one  halfpenny.  In 
1905  the  rates  in  both  cases  were  made  three  farthings;  in  1906,  how- 
ever, both  were  reduced  to  one  halfpenny.  See  p.  115  of  the  Blue  Book 
cited  above  on  page  516. 

2  Between  1902  and  1907  the  revenue  varied  from  £300,000  to  £350,000 
a  year.  By  1910  the  revenue  was  only  £9,066.  Cf.  the  Official  Yearbook 
of  New  South  Wales,  1909-1910,  by  John  B.  Trivett,  government  statis- 
tician, Sydney,  1911,  p.  336. 

'  As  the  unimproved  value  rises  above  £250  the  exemption  diminishes 
at  the  rate  of  £1  for  every  £1  of  excess,  so  as  to  leave  no  exemption  at  all 
when  the  land  is  worth  £500. 


*  UNIMPROVED 
VALUE 

RATE 

(per  pound) 

unimproved 

VALUE 

RATE 

(per  pound) 

Under  £  2,500 
2,500-    5,000 
5,000-  15,000 
15,000-30,000 

Id. 

iHd. 

13^. 

md. 

£30,000-   50,000 
50,000-  80,000 
80,000  and  over 

2d. 

2\id. 

RECENT  REFORMS  IN  TAXATION 


521 


tax  on  land  values  by  the  Commonwealth  in  1910  on  the  lines 
of  the  New  Zealand  scheme.  The  rate  of  this  federal  tax  varied 
from  Id.  to  Qd.  in  the  £  for  residents,  and  from  Id.  to  7d.  for  ab- 
sentees.^ In  1914  the  maximum  rates  were  increased  to  9d.  and 
lOd.  respectively,  and  in  1917  to  lOJ/^rf.  and  Ud.  respectively. 

Although  the  tax  was  imposed  largely  for  fiscal  purposes,  so- 
cial considerations  were  by  no  means  lacking.  From  the  fiscal 
point  of  view  the  tax  still  forms  a  relatively  insignificant  feature 
in  the  federal  budget,  the  yield  in  1911  being  about  £1,370,000 
as  against  over  fifteen  millions  from  other  sources,  chiefly  excise 
and  postal  revenue.  So  far  as  the  burden  on  the  landowners  is 
concerned,  however,  there  must  be  added  to  this  federal  tax  the 
state  taxes  on  land.^ 

Bearing  this  in  mind  it  may  be  said  that  the  scale  in  Australia 
is  now  higher  than  in  New  Zealand.  In  both  cases  the  social 
results  may  be  expected  to  be  more  appreciable  in  the  future, 
especially  so  far  as  the  largest  estates  are  concerned.  Two 
and  one-half  to  three  per  cent  on  land  values  is  equivalent 


*  The  exact  scales 

are  as  follows: 

• 

residents 

absentees 

RATE 

RATE 

VALUES 

(per  pound) 

VALUES 

(per  pound) 

Up  to    £  5,000 

exempt 

Up  to      £  5,000 

Id. 

5,000-   15,000 

Id. 

£  5,000-  20,000 

2d. 

15,000-   30,000 

2d. 

20,000-  35,000 

3d. 

30,000-   45,000 

3d. 

35,000-   50,000 

4d. 

45,000-   60,000 

4(/. 

50,000-  65,000 

5d. 

60,000-   75,000 

5d. 

65,000-  80,000 

Qd. 

over        75,000 

Qd. 

over        80,000 

7d. 

2  The  yield  of  the  land  tax  in  the  Australian  states  for  the  past  few  years 
is  as  follows: 


1905-06 

1907-08 

1909-10 

New  South  Wales 

£336,785 

103,536 

94,601 

54,776 

£178,889 
89,496 
93,762 
11,140 
57,742 

£    9,066 

114,357 

94,126 

34,344 

79,021 

Victoria 

South  Australia 

Western  Australia 

Tasmania 

Total 

£589,698 

£431,029 

£330,914 

Cf.  The  Official  Yearbook  of  the  Commonwealth  of  Australia  of  1901-1910, 
No.  4,  Melbourne,  1911,  p.  840. 


522 


ESSAYS  IN  TAXATION 


to  fifty  per  cent  on  the  income — an  obviously  prohibitory  tax. 
Whether  the  tax  will  turn  out  to  be  destructive  of  large  hold- 
ings will  depend  chiefly  on  the  general  conditions  of  prosperity 
and  on  the  rise  in  the  value  of  the  land.  If  land  values  rise 
faster  than  the  amount  of  the  tax,  the  influence  of  the  law  will 
continue  to  be  slight.  To  the  extent,  however,  that  there 
may  be  a  slackening  in  the  rise  of  lantl  values,  the  effect  of  the 
tax  will  soon  be  apparent. 

VI.  The  Exemption  of  Improvements  in  Australasia 

The  second  point  of  interest  in  the  Australasian  development 
is  that  the  principle  of  lund-value  taxation,  first  applied  in  the 
states,  has  been  extended  not  only  to  federal,  but  also  to  local 
taxation.  It  is  true  indeed  that  the  form  which  the  local  move- 
ment has  taken  has  been  shghtly  different  from  that  of  the  state 
and  federal  movements.  The  local  taxes  or  rates,  as  they  are 
called,  were  originally  levied  largely  on  the  same  principle  as 
in  the  mother  country;  that  is,  the  rates  were  imposed  on  the 
rental  value  or  the  so-called  annual  value  of  real  estate.  The 
practical  consequence  was  the  same:  when  the  property  was  not 
rented  it  was  assumed  to  possess  no  rental  value  and  it  therefore 
paid  no  taxes.  Under  this  system,  vacant  land  might  be  held 
out  of  the  market  for  speculative  purposes  for  an  indefinite  time. 
To  prevent  this  practice,  a  movement  set  in  to  replace  the  tax 
on  rental  values  by  one  on  capital  values.  In  some  cases  a 
further  step  was  taken:  improvements  were  exempted  in  whole 
or  in  part,  so  that  the  tax,  to  an  increasing  extent,  now  fell  upon 
bare  land  values. 

It  is  true  that  in  the  majority  of  the  Australasian  states  this 
new  system  has  not  yet  been  introduced.  Thus  Victoria,  South 
Australia,  West  Australia  and  Tasmania  still  levy  the  rates  on 
annual  value.  But  in  the  three  other  states,  namely,  in  New 
South  Wales,  Queensland  and  New  Zealand,  the  new  system  has 
been  applied.  In  Queensland  the  law  dates  back  as  far  as  1890; . 
in  New  Zealand  to  1896,  and  in  New  South  Wales  to  1906,  al- 
though in  each  case  the  system  was  actually  inaugurated  a  few 
years  later. 

In  Queensland  the  Valuation  and  Rating  Act  of  1890  was 
passed  chiefly  for  fiscal  reasons.  The  movement  goes  back  to 
a  law  of  1879  known  as  the  Divisional  Boards  Act.^    While  this 

*  For  the  history  of  these  earlier  attempts,  cj.  p.  197  et  seq.  of  the  Blue 
Book  mentioned  above,  on  page  516. 


RECENT  REFORMS  IN  TAXATION 


523 


bill  was  under  discussion  it  was  suggested  that  as  considerable 
areas  of  country  were  in  process  of  purchase  from  the  crown, 
under  the  condition  that  certain  improvements  be  made,  the 
obligatory  improvements  ought  to  be  exempt  for  rating  purposes, 
as  otherwise  the  conditional  purchasers  might  delay  making 
them.  The  purpose  of  this  suggestion  was  obviously  to  accel- 
erate the  settlement  of  the  country.  The  further  suggestion  that 
the  concession  for  improvements  ought  to  be  extended  to  the 
towns  was  stoutly  opposed,  and  in  the  case  of  country  lands  the 
endeavor  to  exempt  improvements  other  than  houses  and  build- 
ings was  defeated.  The  law  as  passed,  provided  that  in  the  case 
of  ratable  property  in  the  country  districts,  there  should  be  a  sep- 
arate valuation  of  land  and  of  houses,  and  that  there  should  be 
deducted  from  the  total  annual  rental  value  "  an  amount  equal  to 
one-half  that  portion  of  such  rent  as  shall  be  deemed  to  arise  from 
any  buildings  that  may  be  situated  on  such  ratable  property." 

This  remained  the  situation  until  1887  when  the  Valuation  Act 
provided  that  in  the  case  of  town  and  suburban  lands  the  annual 
rental  subject  to  taxation  should  be  estimated  as  a  sum  equal 
to  two-thirds  of  the  rental  value,  including  improvements.  A 
further  modification  was  introduced  in  fixing  the  tax  limit.  In 
the  case  of  unimproved  land  the  minimum  fixed  for  the  rate 
of  taxation  was  a  little  higher  than  upon  improved  land  (eight 
instead  of  five  per  cent  upon  the  fair  capital  value),  and  where 
the  land  was  "fully"  improved,  no  minimum  at  all  was  insisted 
upon.  Furthermore,  it  was  provided  that  county  lands  should 
be  estimated  at  the  fair  average  value  of  unimproved  land  of  the 
same  quality  in  the  same  neighborhood,  the  annual  value  to  be 
taken  at  a  certain  percentage  of  this  capital  value.  Thus  im- 
provements were  taxed  more  lightly  than  land  in  the  towns,  and 
were  completely  exempted  in  the  country  districts. 

In  1890  the  general  finances  of  Queensland  caused  grave  con- 
cern, and  after  the  failure  of  an  effort  to  levy  an  additional  tax 
upon  property  of  all  descriptions,  the  Valuation  and  Rating  Bill 
was  so  framed  as  to  give  the  local  authorities  greater  taxing 
powers.  Hitherto  the  state  government  had  given  £2  for  every 
£1  raised  locally  by  the  divisional  boards.  In  the  course  of  the 
discussion  the  proposition  was  made  not  only  to  change  the  sys- 
tem of  local  rating  from  rental  to  capital  value,  but  also  to  pro- 
vide for  a  total  exemption  of  all  improvements.  Public  atten- 
tion, however,  was  more  strongly  directed  to  the  need  of  increas- 
ing local  taxation  than  to  the  particular  method  of  rating. 


524 


ESSAYS  IN  TAXATION 


tf 


I 


In  the  years  following  the  adoption  of  this  new  system  the 
valuation  of  land  fell  off  very  greatly,  necessitating,  of  course, 
a  progressively  increasing  rate  of  tax.  Up  to  1893  the  decrease 
m  the  valuations  may  be  ascribed  to  the  law.  After  1893, 
however,  it  must  be  in  part  ascribed  to  the  commercial  crisis 
of  1893,  from  which  AustraUa  did  not  recover  until  the  beginning 
of  the  new  century.  ^  In  the  larger  towns  this  situation  caused 
no  little  anxiety  and  led  to  the  appointment  of  a  royal  commis- 
sion in  1896.  While  the  report  of  the  commission  was  on  the 
whole  favorable  to  the  new  system,  it  must  be  remembered  that 
the  comparison  was  between  the  new  system  of  taxing  the  capi- 
tal value  of  land  and  the  old  one  of  taxing  the  rental  value  of  all 
real  estate.  The  law  of  1890  had  still  included  the  valuation  of 
buildings  in  the  case  of  occupied  crown  lots  on  mineral  fields, 
owing  to  the  difference  in  the  marketable  capital  value  of  the 
land  as  compared  with  other  lands.  But  in  1902  the  Local 
Authorities  Act  extended  the  principle  of  the  exemption  of 
improvements  for  local  rates  to  all  lands. 

The  next  state  to  adopt  the  system  was  New  Zealand.  In 
1896  an  Optional  Rating  Act  was  passed,  giving  the  local  bodies 
the  option  of  choosing  between  the  ordinary  rating  system, 
according  to  annual  value,  and  a  new  tax  on  the  unimproved 
capital  value  of  land.  The  law,  still  in  force,  provides  that  a 
shilling  in  the  pound  on  the  annual  value  shall  be  deemed  to  be 
equivalent  to  three  farthings  in  the  pound  on  the  capital  value 
of  any  ratable  property;  or  that  the  annual  value  of  any  rat- 
able property  should  be  deemed  equal  to  six  per  cent  of  its  capital 
value.  The  rates  on  the  unimproved  value  of  the  land  must  "  be 
so  adjusted  as  to  equal  as  nearly  as  may  be,  but  not  to  exceed,  in 
producing  capacity,  the  rates  made  and  levied  on  the  annual  or 
capital  value  as  the  case  may  be  "  under  the  old  law.  The  annual 
value  is  deemed  to  be  the  letting  value  less  twenty  per  cent  in 
the  case  of  houses,  buildings  and  other  perishable  property,  and 

1  As  an  example  of  this  change  we  append  the  vahiation  figures  for  the 
city  of  Brisbane,  as  found  on  p.  202,  the  Blue  Book  cited  above: 

VALUATION 

1890,  under  the  old  system  £9,061,450 

1891,  under  the  new  system  8,800,351 
1802      "        "      "        "  7,814,185 

1893  "  •'  "  "  6,745,553 

1894  "  -  -  "  6,363,308 

1895  "  "  "  «  5,807,541 
190*-^  "  "  ''  "  5,8S2,055 


RECENT  REFORMS  IN  TAXATION 


525 


less  ten  per  cent  in  the  case  of  land;  but  in  no  case  shall  the  an- 
nual value  be  deemed  to  be  less  than  five  per  cent  of  the  value 
of  the  fee  simple.  The  capital  value  is  deemed  to  be  the  selling 
value  of  the  land  including  improvements.  The  maximum  limit 
of  the  tax,  so  far  as  the  general  rate  is  concerned,  is  fixed  at  2s 
in  the  pound  on  the  annual  value  or  at  13^2^.  in  the  pound  on  the 
capital  value  of  all  ratable  property,  or  its  equivalent  on  the 
unimproved  value. ^ 

The  law  provides  that  the  petition  to  change  to  the  new 
system  must  be  signed  by  at  least  fifteen  per  cent  of  the  rate 
payers,  and  that  it  must  be  adopted  by  a  majority  vote.  In 
1899  the  first  locality  made  use  of  this  provision,  and  during 
the  next  few  years  the  system  gradually  spread.  By  1906 
seventy-five  localities  had  decided  to  take  a  vote  on  the  change 
and  out  of  these  seventy-five,  sixty-three  voted  "yes"  and 
twelve  voted  ''no."  A  few  years  later,  in  1909-10,  out  of  159 
boroughs  m  New  Zealand,  43  levied  the  local  rates  on  the  unim- 
proved value  of  land,  18  on  the  capital  value  of  real  estate  and 
40  according  to  the  old  system  of  annual  value.  ^ 

As  the  boroughs  are  naturally  the  most  prosperous  parts  of 
the  counties,  the  importance  of  the  unimproved  value  system 
is  really  somewhat  greater  than  would  appear  from  the  above 
figures.  As  a  matter  of  fact,  almost  one-third  of  all  the  rates 
were  collected  under  the  new  system.^  Of  the  four  largest  cities 
two,  Wellington  and  Christ  Church,  have  adopted  the  sys- 
tem of  exemption  of  improvements,  but  the  other  two,  Auckland 
and  Dunedin  have  refused  it.  In  considering  the  above  figures, 
moreover,  two  points  must  be  remembered:  first  that  as  the  old 
system  was  supplanted  the  new  one  of  basing  the  rates  on  capital 

'NewZealandOfficial  Yearbook/or  1911,  Wellrngton,  1911   p   169 
2  The  figures  for  the  different  local  divisions  are  as  follows : 


TOTAL 
REPORT- 
ING 

RATES  ON- 
RENT  AL 
VALUE 

RATES  ON 

CAPITAL 

VALUE 

RATES  ON 
UNIM- 
PROVED 
VALUE 

Counties 

346 

109 

23 

478 

6 

48 
2 

156 

286 
18 
17 

321 

54 
43 

4 
101 

Boroughs 

Independent  town 
Total 

boroughs 

3  Full  details  for  each  locality  will  be  found  in  the  New  Zealand  Official 
Yearbook,  1911,  pp.  178  to  192,  inclusive. 


1:  / 

J 


526 


ESSAYS  IN  TAXATION 


or  selling  value  was  chosen  by  five  times  as  many  counties  and 
about  half  as  many  boroughs  as  those  that  selected  the  method  of 
exemption  of  improvements;  and  secondly  that  the  system  of 
rating  on  the  unimproved  value  of  land  applies  only  to  the  so- 
called  general  rate,  and  not  to  the  special  rates  levied  for  water, 
gas,  electric  light,  sewage,  hospital  or  poor  relief  purposes. 

In  New  South  Wales  the  system  was  inaugurated  almost  a  dec- 
ade later.    In  1905  the  so-called  Shires  Act  was  passed  which, 
as  supplemented  by  the  Local  Government  Extension  Act  of 
the  following  year,  provided  that  the  general  local  rates  should 
thereafter  be  levied  on  the  unimproved  value  of  the  land  at  a  rate 
of  not  less  than  Id.  nor  more  than  2d.  in  the  pound.    A  council 
of  a  municipality  which  has  levied  a  rate  of  not  less  than  Id.  on 
the  unimproved  value  is  permitted  to  impose  such  additional  rate 
as  may  be  required  on  either  the  improved  or  the  unimproved 
value.    The  total  amount,  however,  to  be  derived  from  these 
general  rates,  taken  together,  is  required  not  to  exceed  the 
amount  yielded  by  a  rate  of  2d.  in  the  pound  (0.83  per  cent)  on 
the  unimproved  value,  or  Is.  6d  in  the  pound  (7.5  per  cent) 
on  the  assessed  annual  value  of  all  ratable  land.i     It  is  also 
provided  that  as  soon  as  any  locality  puts  this  new  system  into 
force  the  operation  of  the  state  tax  on  land  values  is  to  be  sus- 
pended.2   Here,  again,  it  is  to  be  noted  that  in  addition  to  the 
general  rates,  the  so-called  special  rates,  as  well  as  local  and  loan 
rates  may  be  imposed  on  either  the  improved  or  the  unimproved 
value.    Most  of  the  municipalities  have,  however,  chosen  to  levy 
these  extra  rates  on  unimproved  value.    An  important  exception 
consists  of  the  rates  imposed  by  certain  water-supply  and  sewer- 
age boards  which  are  still  levied  according  to  the  old  system.    In 
1912,    sixty-four   out   of   seventy-three   municipal   and   shire 
councils  raised  £399,197  on  land  values  of  £31,344,898,^  the  av- 
erage rate  for  all  local  taxes  being  1.27%  of  the  value  of  the 
land.    It  will  be  seen  how  low  the  rate  of  taxation  is,  as  com- 
pared with  American  conditions. 

Finally,  it  may  be  added  that  in  South  Australia  the  Land 
Values  Assessment  Act  has  for  some  time  permitted  the  locali- 
ties to  substitute  for  the  existing  local  rates,  which  may  be 

*  Official  Yearbook  of  the  Commonwealth  of  Australia,  1901-1910  Mel- 
bourne,  1911,  p.  985.  ' 

'  Cf.  supra,  p.  520. 

»  The  figures  are  printed  in  detail  in  the  Sydney  Standard,  and  reprinted 
in  the  March,  1912,  issue  of  the  Melbourne  Progress. 


I 


RECENT  REFORMS  IN  TAXATION 


527 


levied  either  on  gross  annual  rental  or  on  capital  value,  a  new 
system  of  taxes  on  the  unimproved  value  of  land.  No  locality, 
however,  has  yet  availed  itself  of  this  permission. 

Such  has  been  the  development  of  the  law.  What  are  the 
practical  results?  It  is  usually  claimed  by  the  advocates  of  the 
system  that  the  exemption  of  improvements  will  do  away  with 
speculation,  stimulate  the  building  trade,  lower  house  rentals 
and  abolish  congestion  of  population  in  the  cities.  What  light 
does  the  Australasian  experience  throw  upon  these  claims? 

In  considering  this  problem  we  are  dependent  for  informa- 
tion largely  upon  the  reports  of  the  local  authorities.  In  a  few 
cases  we  have  some  information  as  to  the  local  results  of  the  state 
taxes  on  land  values;  but  these  taxes,  it  will  be  remembered, 
are  so  insignificant  as  to  be  almost  devoid  of  importance  in 
the  towns.  Thus  in  South  Australia,  where  after  1895  consider- 
able areas  of  suburban  land  in  the  towns  were  built  upon,  we 
are  told,  in  an  official  report  of  190G,  that  "much  of  the  improve- 
ment would  have  occurred  irrespective  of  taxation,  with  the 
gradual  growth  and  advancement  of  the  state."  ^  Furthermore, 
we  are  informed  that  ''on  the  rental  of  house  property  and 
vacant  sites,  the  effect  is  not  appreciable.''  Finally  we  are  told 
that  while  there  was  a  falling  off  in  speculation,  this  was  due 
entirely  to  the  collapse  of  the  land  boom  in  the  eighties,  for 
"this  phase  of  speculation  is  in  no  wise  affected  by  taxation.^ 

Similar  testimony  comes  from  New  South  Wales.  The  acting 
statistician  of  that  state  tells  us  that  the  effect  of  the  state 
tax  on  land  values  has  been  inappreciable.  Suburban  building 
has  indeed  considerably  advanced,  "but  there  is  no  doubf  that 
much  of  the  extension  is  due  to  the  facilities  for  settling  in 
the  suburbs  afforded  by  the  excellent  tramway  system."  ^ 
Rentals  in  the  suburbs  have  indeed  fallen,  but  "the  reduc- 
tion is  due  but  slightly  to  the  operation  of  the  land  tax,  the 
chief  cause  being  the  opening  up  of  newer  and  more  select 
localities  through  the  extension  of  the  metropolitan  tramway 
and  railway  system."  He  adds:  "as  regards  the  suburbs  be- 
yond the  influence  of  the  tramway  system,  experience  shows 

»  "Papers  relative  to  the  Working  of  Taxation  of  the  Unimproved  Value 
of  Land  in  New  Zealand,  New  South  Wales  and  South  Australia,"  in  the 
Blue  Book  mentioned  above.    See  especially  p.  115. 

*  Ibid,  p.  116. 

» Ibid,  p.  132. 


528 


ESSAYS  IN  TAXATION 


that  in  general  there  has  not  been  any  material  alteration  in 
rents  for  ordinary  tenements."  The  entire  situation  is  summed 
up  in  these  words:  ''On  the  whole  it  may  be  said  that  the  land 
tax  has  had  no  very  appreciable  effect  on  any  of  the  conditions 
referred  to,"  that  is,  the  building  trade,  rentals,  vacant  sites 
or  land  speculation.  This  conclusion  is  concurred  in  by  the 
First  Commissioner  of  Taxation  who  says  that:  ''taking  the 
operation  of  the  land  tax  as  a  whole,  it  is  not  considered  that 
it  has  had  any  pronounced  effects  on  the  land  generally,"  so 
far  as  the  towns  are  concerned.^ 

The  effect  of  the  state  taxes  on  land  value  accordingly,  was 
unimportant.  As  to  the  effect  of  the  exemption  of  improvements 
in  local  taxation,  the  existing  information  is  limited  to  New 
Zealand  and  Queensland.  In  New  Zealand  the  commissioner  of 
taxes  sent  a  circular  addressed  to  all  the  local  authorities:  fifty- 
two  replies  were  received,  of  which  a  digest  has  been  printed. 
While  not  a  little  testimony  unfavorable  to  the  new  system  was 
elicited,  most  of  the  localities  declare  it  satisfactory.  During 
the  period  of  its  operation  there  was  a  general  increase  of  pros- 
perity throughout  the  state.  In  some  of  the  replies,  however, 
doubt  is  expressed  whether  this  prosperity  was  in  any  way  due 
to  the  method  of  taxation.  The  great  majority  of  the  replies 
are  to  the  effect  that  no  especial  results  can  be  discerned  either 
one  way  or  the  other.  Thus  the  Eketahuna  council  writes: 
"unable  to  say  what  effect  is,  as  success  of  the  dairying  industry 
overshadows  the  effect  of  taxation."  The  Hokitika  council 
writes  that  many  new  buildings  "have  recently  been  erected, 
but  this  is  attributed  to  prosperity  rather  than  change  in  rat- 
ing." The  Hawera  council  tells  us  that  the  "building  trade, 
rent,  land  speculation,  etc.,  have  not  been  affected  to  any  ap- 
preciable extent."  The  Pahiatua  council  writes  that  the  brisk- 
ness in  the  building  trade  "is  considered  due  to  natural  causes," 
and  to  the  general  prosperity  of  the  community. 

Again,  so  far  as  the  influence  of  taxation  on  rents  is  con- 
cerned, while  some  localities  think  that  rentals  have  been 
reduced,  others  state  the  contrary.  Thus,  Grey  Lynn  tells 
us  that  the  system  "does  not  affect  building  trade,  and  has  not 
tended  to  reduce  rents."  The  Kairanga  council  says:  " Building 
trade  not  stimulated;  rents  little  affected."  From  Karori  bor- 
ough we  hear:  "do  not  think  building  trade  or  rents  affected." 
From  Maraetai  we  learn:  "no  perceptible  change  in  buildings 

1  Blue  Book,  op.  cit.,  p.  133. 


RECENT  REFORMS  IN  TAXATION 


529 


or  otherwise."  The  North  East  Valley  borough  states:  "does 
not  materially  reduce  rents."  Finally,  Woolston  borough 
■  informs  us  that  while  the  building  trade  is  improving  "rentals 
are  not  lower."  Some  localities  in  fact  go  still  further  and  call 
attention  to  the  inevitable  results  of  the  system.  Thus,  the 
Stratford  borough  council  holds  that  the  "system  acts  unfairly 
and  tends  to  the  crowding  of  houses  on  small  sections,"  and  from 
Winton  borough  we  hear  that  the  system  "throw^s  tax  much 
heavier  on  unimproved  sections  and  appears  to  benefit  those 
who  crowd  good  buildings  on  small  areas."  ^  The  testimony 
from  New  Zealand  thus  appears  to  be  inconclusive  and  some- 
thing at  least  can  be  said  on  both  sides  of  the  question. 

When  we  come  to  Queensland  we  find  a  very  able  report 
from  Mr.  Corrie,  a  leading  architect  who  has  served  for  many 
years  as  a  valuer  in  Brisbane.  While  he  is  favorable  on  the 
whole  to  the  exemption  of  improvements,  he  tells  us  that  the  ob- 
jection that  the  system  must  lead  to  the  over-utilization  of  the 
land  "has  not  so  far  been  tested  in  the  state."  ^  Moreover, 
he  is  decidedly  of  the  opinion  that  while  the  system  has  hitherto 
worked  fairly  well,  there  are  distinct  Umits  to  its  usefulness  and 
even  to  its  possibility.    He  writes: 

"Although  raising  considerable  local  revenues  on  unimproved  land 
value  has  so  far  met  with  little  objection,  it  by  no  means  follows  that 
very  profound  study  has  been  accorded  to  the  subject  by  those  most 
interested.3  ...  As  further  duties  come  under  local  government 
jurisdiction,  the  present  system  cannot  escape  from  vdy  critical  ex- 
amination, for  manifestly  there  is  a  limit  to  the  burden  which  will  be 
accepted  upon  any  single  class  of  property." 

He  tells  us  that  since  the  local  taxes  on  land  values  are  at 
present  not  excessive  and  are  expended  upon  services  from  which 
the  land  derives  a  reasonable  benefit,  there  is  not  much  likelihood 
of  discontent  soon  arising  from  the  system  in  Queensland. 
But  he  points  out  that  as  soon  as  the  land  tax  increases 
to  the  point  of  diminishing  the  capital  value  of  the  land,  dis- 
content will  be  sure  to  arise.  What  has  saved  the  system  thus 
far  has  been  the  low  rate,  coupled  with  the  rise  of  land  values 
due  to  the  general  prosperity  of  the  colony.     He  adds: 

"As  taxes  increase,  however,  and  especially  as  fresh  duties  have  to 
be  undertaken,  all  the  issues  will  be  less  simple,  and  other  forms  of 


fl 


1  Op.  cit.,  pp.  138-140. 


^lUd.,  p.  211. 


3  Ihid.,  p.  212. 


530 


ESSAYS  IN  TAXATION 


'«> 


I 


• 


property— as,  for  instance,  in  the  fight  over  the  Brisbane  hotels  ques- 
tion—will  be  looked  to  for  contribution  as  well  as  land." 

His  conclusion  is  that  the  future  has  in  store  the  "due  recog- 
nition of  two  important  factors  in  municipal  finance  (not  satis- 
factorily accounted  for  under  a  land  tax)~mz., '  ability  to  pay  '— 
and  the  now  equally  recognized  principle  that  'persons  as  well 
as  things'  should  contribute."  ^ 

From  this  Australasian  evidence  three  inferences  can  be  drawn : 
In  the  first  place,  so  far  as  the  testimony  is  favorable  to  the  ex- 
emption of  improvements,  it  must  be  remembered  that  the  new 
system  is  compared  with  the  old  method  of  taxing  rents.    What 
pleases  the  public,  so  far  as  they  are  pleased,  is  not  so  much  the 
exemption  of  improvements  as  the  change  from  taxation  of  rent- 
als to  taxation  of  capital  value.    This  is  apparent  from  the  tes- 
timony.   Thus,  for  instance,  the  Wellington  city  council  favors 
the  new  method  chiefly  because  it  "paralyzes  the  old  system 
under  which  rental  values  on  lands  could  by  simple  manipula- 
tion reduce  local  taxation  to  a  farce."  2    in  this  connection  it  is 
a  most  significant  (although  hitherto  unnoted)  fact  that  in 
South  Australia,   where  the  exemption   of  improvements   is 
legally  permissible  and  where  no  locality  has  yet  availed  itself 
of  the  permission,  the  old  system  of  local  rates  allows  an  assess- 
ment on  capital  values.    That  is  to  say:  where  local  rates  are 
levied  only  on  rental  values,  there  arise  all  the  difficulties 
which  have  induced  England  and  Germany  to  impose  new  land 
taxes,  and  which  have  led  in  Australasia  to  the  exemption  of 
improvements;  but  where  the  tax  is  levied  on  capital  instead  of 
rental  values,  as  is  the  case  in  the  United  States  and  as  is  true 

»  These  inferences  are  corroborated  by  the  results  of  an  independent 

investigation  subsequently  made  by  J.  E.  Le  Rossignol  of  Denver  and 

WD.  btewart  of  Dunedin  in  an  article  entitled  "Rating  of  Unimproved 

Vahies  m  New  Zealand,"  and  published  in  Addresses  and  Proceedings  of  the 

first  Conference  of  the  National  Tax  Association,  New  York    1908  p  973 

et  seq.    After  pointing  out  that  in  cities  like  Wellington,  overcrowding  has 

been  increased  rather  than  diminished,  and  that  taxes  on  rural  property 

m  general  have  been  relatively  increased  as  compared  with  taxes  on  town 

property,  the  authors  tell  us  that  "the  facts  do  not  warrant  optimistic 

conclusions.  ...  The  benefits  of  rating  on  improved  value  are  not  so 

obvious  as  to  command  unanimous  approval.  ...  The  opposition  to  the 

system  appears  to  be  growing  stronger  as  the  people  are  coming  to  recognize 

its  relation  to  the  propaganda  for  single  tax.  ...  Up  to  the  present  time 

the  economic  effects  of  rating  on  unimproved  value  have  been  insignificant." 

oce  esp.  p.  .&o4. 

^  Ibid.,  p.  140, 


RECENT  REFORMS  IN  TAXATION 


531 


in  large  measure  in  South  Australia,  the  tendency  to  any  change 
is  far  less  apparent.  So  far,  therefore,  as  the  results  of  the 
Australasian  system  of  exempting  improvements  from  taxation 
are  deemed  favorable,  they  may  be  declared  to  be  due  primarily 
to  the  adoption  of  the  system  of  taxing  capital  instead  of  rental 
values. 

In  the  second  place,  even  thus  limited,  the  reports  of  the  ex- 
periments in  Australasia  are  inconclusive.  In  some  cases  we  hear 
of  good,  in  other  cases  of  bad  results.  Nowhere  has  a  careful 
study  been  made  of  the  consequences  of  the  exemption  of  im- 
provements as  compared  with  a  tax  on  the  capital  value  of 
all  real  estate.  Finally,  as  the  experience  of  Queensland  clearly 
shows,  the  whole  system  is  of  slight  importance  partly  be- 
cause the  rates  have  been  low,  and  partly  because  the  adop- 
tion of  the  new  method  of  assessment  has  come  at  about  the 
same  time  as  the  recovery  from  the  long  depression  of  the  early 
nineties. 

When  to  all  these  considerations  we  add  the  fact  that  in  most 
cases  only  a  portion  of  the  local  rates  are  levied  on  land  values, 
we  are  forced  to  the  conclusion  that  a  much  longer  experience 
will  be  required  before  it  can  be  asserted  with  any  reasonable 
degree  of  confidence  that  the  system  of  exempting  improvements 
from  taxation  has  had  results  at  all  comparable  to  those  that 
are  often  ascribed  to  it  by  hasty  writers. 

VII.  The  Australian  Income  Tax  and  the  Relation  of  State  to 

Federal  Finance 

The  third  phase  of  tax  reform  in  Australasia  mentioned 
above  ^  is  the  development  of  the  income  tax.  Here  again  we 
have  to  deal  not  with  the  sudden  introduction  of  any  new  prin- 
ciple, but  with  the  elaboration  of  a  system  initiated  some  time 
ago.  The  last  few  years  have  everywhere  witnessed  a  growing 
realization  of  the  importance  of  income  taxation,  and  in  several 
states  the  year  1910  marked  a  significant  change. 

Australasia  was  among  the  earliest  democracies  to  intro- 
duce progressive  inheritance  taxes.  These  have  remained  sub- 
stantially unchanged  for  several  decades.  Income  taxes 
came  considerably  later.  With  the  exception  of  South  Aus- 
tralia where  such  a  tax  was  introduced  in  1884  there  were 
no  income  taxes  on   the  Australian  continent  until  shortly 


|| 


1  P.  516. 


532 


ESSAYS  IN  TAXATION 


It  ■' 


'Ml 


before  the  end  of  the  nineteenth  century.  New  Zealand  fol- 
lowed in  1891  when  an  attempt  was  made  to  reach  incomes 
by  the  same  act  which  imposed  the  land  tax.  The  income  tax 
was  only  slightly  progressive:  6c?.  in  the  pound  on  the  first  tax- 
able £1,000,  and  Id,  on  each  additional  £1,000.  It  was  not 
until  1895  that  Victoria  and  New  South  Wales  introduced 
the  income  tax,  and  not  until  1902  that  Queensland  and  Tas- 
mania followed  suit.^  In  the  year  1907,  however,  there  began 
a  new  phase  of  income  taxation:  such  taxes  were  introduced 
where  they  had  not  yet  existed,  and  almost  everywhere  the  old 
taxes  were  increased  both  in  amount  and  in  the  steepness  of  the 
scale  of  progression.  Thus  in  1907  the  income  tax  system  was 
extended  to  Western  Australia  and  the  earlier  laws  of  Queens- 
land and  New  South  Wales  were  amended;  and  in  1910  the 
rates  in  Victoria,  Tasmania  and  New  Zealand  were  increased, 
in  some  cases  to  a  substantial  extent.  Finally  the  Great  War 
not  only  led  to  considerably  higher  rates  in  all  the  Australian 
states  but  brought  about  in  1915,  the  introduction  of  a  federal 
income  tax  with  an  elaborate  scale  running  up  to  25  per  cent. 
The  details  will  be  found  in  the  note.^ 

» In  Seligman,  Progressive  Taxation  in  Theory  and  Practice,  2d  ed.,  1908, 
p.  97  ei  seq.,  will  be  found  a  detailed  account  of  all  the  income  taxes  which 
were  in  force  in  Australasia  up  to  1906,  with  the  single  exception  of  New 
South  Wales,  where  the  income  tax  was  not  levied  according  to  the  pro- 
gressive principle.  In  New  South  Wales  the  law  of  1895  imposed  a  tax  of 
6d.  in  the  pound  on  all  incomes  of  £200  and  over,  if  not  derived  from  land. 

2  Victoria.  The  law  of  1895  provided  for  a  progressive  scale  which  was 
changed  in  1903  and  1904.  In  the  case  of  incomes  from  personal  exertion, 
the  rate  (1912)  was: 


INCOMES 

£100  to  £   500 
500 "      1,000 


RATES 

(per  £) 

Sd. 
M. 


INCOMES 

£1,000  to  £1,500 
over  1,500 


RATES 

(per  £) 

5d. 
6d. 


If  the  income  was  derived  from  property,  the  rates  were  doubled.  In  1906 
incomes  under  £200  were  exempted,  and  an  abatement  of  £150  was  allowed 
on  incomes  from  £200  to  £500.  In  1908  a  distinction  was  made  between 
individual  and  corporate  incomes,  the  former  being  reduced  by  20  per 
cent;  but  in  1910  this  was  repealed.  Land  used  as  a  residence  by  the  owner 
was  deemed  to  yield  an  income  of  four  per  cent  on  its  capital  value.  A  tax 
of  Id.  in  the  pound  was  imposed  on  the  incomes  of  all  corporations  except 
life  insurance  companies,  which  pay  at  the  rate  of  M.  in  the  pound.  For- 
eign ship  owners  pay  5d.  in  the  pound. 

New  SoiUh  Wales.  The  act  of  1895  was  amended  in  1907;  the  rate  was 
still  6d.  in  the  pound,  but  in  the  case  of  incomes  derived  from  personal 
exertion  the  exemption  was  increased  to  £1,000.    Further  amendments 


RECENT  REFORMS  IN  TAXATION 


533 


From  the  point  of  view  of  revenue  the  income  taxes  play  a 
considerably  greater  role  than  the  land  taxes.  In  New  South 
Wales  and  Victoria,  even  before  the  war,  they  were  exceeded  in 

were  made  in  1911  and  1914.    In  1919  the  rates  varied  from  Sd.  in  the 
pound  on  mcomes  up  to  £700  to  Is.  2d.  on  incomes  over  £9,700,  with  an 
I      1?S.  r  °?^*^^^^  ^^  incomes  from  property.    The  exemption  is  £250 
plus  £50  for  msurance  and  superannuation  premiums,  and  there  is  a  de^ 
duction  of  £50  for  each  child.    For  companies  the  rate  is  Is.  in  the  pound 
Queensland.    The  act  of  1902  was  amended  in  1906  and  1907  as  foUows- 


INCOMES  FROM 
PERSONAL  EXERTION 

£   200-£   500 

500-  1,000 

1,000-  1,500 

over         1,500 


RATES  (per  £) 

6d. 

Qd.  up  to  £   500;  7d.  above 

7d.  up  to  £1,000;  8d.  above 

8d. 


£200  was  deducted  in  every  case.  On  incomes  derived  from  property  the 
rate  was  9d.  m  the  pound,  and  in  the  case  of  absentees  and  corporations,  the 
rate  was  Is.  in  the  pound. 

Soidh  Australia.  The  act  of  1884  has  been  frequently  amended.  The 
rate  m  the  case  of  incomes  from  personal  exertion  was  in  1912  four  pence 
halfpenny  m  the  pound  for  all  incomes  from  £150  to  £800  and  7d  in 
the  pound  above  £800.  In  the  case  of  income  from  property  the  rates 
were  9d.  and  Is.  l}4d.  respectively.  In  the  case  of  incomes  up  to  £400 
£200  were  exempt.  ' 

Western  Australia.   The  law  of  1907  fixed  a  rate  of  4d.  in  the  pound  on  all 
mcomes  over  £200;  and  fifty  per  cent  additional  in  the  case  of  absentees 
Corporations,  however,  were,  by  a  law  of  1899,  as  amended  in  1906,  sub- 
ject to  a  tax  of  Is.  in  the  pound  on  dividends. 

Tasmania.  The  act  of  1902  was  repealed  in  1910,  when  the  following 
rates  were  imposed  in  the  case  of  incomes  from  personal  exertion: 


INCOME 

£125 

125-£150 

150- 

250 

250- 

350 

350- 

400 

400- 

700 

700- 

900 

RATE  (per  £) 
4d. 

4}4d. 

4Hd. 

5^d. 

bHd. 
\M.  on 
\  Id.  on 

6rf.  on 

7d.  on 

M.  on 


INCOME 


RATE  (per  £) 


first  £400 
remainder 
first  £400 
next  £200 
remainder 


£900-£l,000  Qd.  on  first  £400 
7d.  on  next  £200 
M.  on  next  £200 
lOrf.  on  remainder 
Above  £1,000  Same  rates  on  first  £800 
lOd.  on  next  £200 
Is.  on  next  £500 
Is.  2d.  on  next  £500 
Is.  4d.  on  remainder 


In  the  case  of  mcomes  from  property,  the  rate  was  Is.  in  the  pound,  pro- 
vided that  the  income  was  over  £100.  Incomes  under  £80  in  the  case  of  un- 
married persons  or  under  £100  in  the  case  of  married  persons  were  exempted. 
The  following  abatements  were  permitted: 


INCOME 

£  80-£110 
110-  125 
125-  150 


EXEMPTION 

£70 
60 
fiO 


INCOME 

£150-£250 
250-  350 
350-  400 


EXEMPTION 
£40 

30 
20 


534 


ESSAYS  IN  TAXATION 


I 

"I  ^ 


importaiice  only  by  the  inheritance  taxes.  In  Queensland  and 
bouth  Austraha  the  income  tax  was  the  most  important  in 
Western  Australia  the  dividend  tax.    It  is  only  in  Tasmania 

Every  taxpayer,  the  taxable  amount  of  whose  income  was  less  than  £150 
could  clami  a  rebate  of  2s.  6rf.  for  every  child  under  16  years 

In  addition  to  the  mcome  tax  the  law  of  1904,  amended  in  1906,  imposed 
a  so-called  abihty  tax,  the  amount  of  which  was  determined  according  to  the 
TnTn  t"M  ^^  P'^f^'^y  occupied,  or  the  amount  paid  for  board  and 
lodging.     In  the  case  of  property  the  rate  varied  from  Id.  to  6d   in  the 

C^'f2l1t2Tl''^^'K    ^"^  '*!!  '^l^^  ^^"^  ^^  ^^^gi"g  the  rate 

New  Zeahnd.  The  law  of  1891  was  amended  in  1910  as  foUows-  A  deduc- 
tion was  allowed  for  £300  of  income.  Up  to  £700  the  rate  w^  6rf  ifthe 
FK)und,  rising  gradually  until  in  the  case  of  incomes  exceeding  £2,300  the 
rat^  was  1..  2d.  m  the  pound.  In  the  case  of  corporations  there  we^  no  ex! 
emptions  ana  the  rate  varied  from  Is.  to  Is.  2d.  in  the  pound 

nn  tn  ?i^^  ^^^i  ''^j^'^'^^f  one-third.  In  1916  an  extra  Qd.  was  added 
up  to  £900,  and  U  Id.  over  £900.  In  1917  a  special  war  tax  of  4s  Qd  was 
imposed  which,  added  to  the  Ss.  regular  tax,  made  a  ma^mum  of  7s  ^ 
A  deduction  of  £300  was  allowed  when  the  total  income  did  not  exce^ 
£600;  and  between  £600  and  £900,  the  deduction  of  £300  was  r^ucS 

Li     ""a  ^^^'^  ^^  ""^  ^''^^"^^  ^*^^^  ^^-    £25  were  also  allowed  f^eaS 
child  under  sixteen  years  of  age.  *uiuweu  lor  eacn 

The  Commonwealth.   In  the  law  of  1915,  on  incomes  derived  from  personal 
exertions  the  rate  is  3  3/800ri.  per  pound,  increasing  by  3/800d.  wftHach 

TvTZr/""  "Tl  "'  t'  *""^^^^  ^"^'"^  until V  average  rie  of  t^ 
THd.  per  £  IS  reached  on  £7,600.    Over  that  sum  the  rate  is  5s  in  the  £ 

SuowSl^g^'fot'l'f  '^"^  ^^^'""^  '^'  '"''  up  to  £546  is  stated  by  the 


R=  rate. 

1=  taxable  income. 


R=(3  + 


181.058 


> 


On  sums  between  £546  and  £2,000  the  tax  increases  continuously  until 
.t  reaches  33.W.  per  £  on  £2,000  10s..  and  thence  rises  to  a  rate  of  &  Tr  £ 
for  every  £  m  excess  of  £6,500.  An  additional  tax  is  le™ed  of  '55^  ^ 
weU  as  a  supertax  of  30%  of  the  total  amount  of  the  ta^.     The  ex^mntio^ 

every  Lb  m  excess  of  £100.  In  the  case  of  married  taxpayers  or  those  with 
dependents  the  exemption  is  £150  le^  £1  for  eveiy^£3'n  exc^  of  T^ 
The  deductions  are  £26  for  every  child  under  sixt^n;  £^  forfrfendTy 
^cie  y  and  superannuation  premiums;  another  £50  for  life  assurance  ^d 
fidelity  guarantee  premiums;  and  all  gifts  over  £5  to  pubhc^SritableTn- 
stitutions  or  war  rehef  funds.  Winnei^  of  prizes  in  lotteries  pay  13%  Ab" 
sent_ees  are  taxed  on  their  income  received  in  Australia.  Companies  pay 
8d.  in  the  £  on  dividends  and  interest  to  absentees  and  2s.  Qd  in  r£  on  2^ 
taxable  income  not  distributed.  u  ^«.  oo  m  a  i.  on  au 


RECENT  REFORMS  IN  TAXATION 


535 


and  New  Zealand  that  the  land  tax  yielded  more  than  the 
income  tax.    Since  the  war  even  this  is  no  longer  true. 

In  Australasia,  as  a  whole,  if  we  take  the  income  and  the  in- 
heritance taxes  together  we  find  that  their  yield  forms  an 
overwhelming  proportion  of  the  revenue  from  direct  taxation. 
Entirely  apart  from  any  consideration  of  the  indirect  taxes 
which  are  still  so  important,  Australasia  may  be  said  to  be 
movmg  away  from,  rather  than  in  the  direction  of,  the  prin- 
ciples of  the  single  tax. 

One  feature  in  the  development  of  the  taxation  of  incomes 
by  the  states  deserves  a  word  of  mention  in  view  of  the  con- 
troversy over  the  general  subject  in  the  United  States.  Origi- 
nally much  difficulty  was  experienced  in  making  the  salaries 
of  federal  officials  subject  to  income  taxation.  In  1907,  however, 
the  federal  Parliament  enacted  the  Commonwealth  Salaries 
Act  which  declared  that  salaries  and  allowances  paid  by  the 
commonwealth  are  liable  to  taxation  by  the  states,  payable  in 
the  state  where  the  officer  resides  and  the  salary  is  earned  or, 
in  the  case  of  a  member  of  Parliament,  in  the  state  in  which  he 
was  elected.  The  only  exemption  is  the  salary  of  the  governor- 
general. 

The  fourth  and  final  point  in  our  consideration  of  tax  reform 
in  Australasia  is  the  relation  of  state  and  federal  finance.    When 
the  commonwealth  was  created  in  1900,  the  constitution  vested 
m  the  federal  government  exclusive  power  of  levying  customs 
and  excise  duties  and  in  the  state  and  the  federal  governments 
concurrent  powers  of  direct  taxation.   But  as  the  revenues  of  the 
various  states  had  previously  been  derived  largely  from  cus- 
toms and  excises,  and  as  it  was  practically  certain  that  the 
commonwealth  expenditures  would,  for  some  years  at  least, 
not  equal  the  revenue  derived  from  these  sources,  it  was  decided 
to  allot  to  the  states  a  certain  proportion  of  this  revenue.    In  de- 
fault of  such  allotments  the  states  would  have  found  it  necessary 
to  raise  the  rates  of  the  taxes  on  inheritances,  incomes  and  land 
to  inordinate  heights.     It  was  accordingly  provided  in  the 
so-called  ''Braddon"  section  of  the  act  by  which  the  federal 
constitution  was  established,  that  during  the  first  ten  years 
of  the  newly  created  union,  and  thereafter  until  otherwise  de- 
cided, there  should  be  returned  to  the  states  three-fourths  of 
the  net  revenue  from  customs  and  excises.    Thus  was  adopted 
the  system  of  the  collection  of  taxes  by  the  central  government, 
with  the  distribution  of  a  part  of  the  proceeds  among  the  states! 


i  ^ 


536 


ESSAYS  IN  TAXATION 


!• 


^/ 


The  Braddon  clause  was,  however,  not  the  only  section  affect- 
ing the  relations  of  federal  and  state  government.  Many  func- 
tions of  government,  which  under  the  American  system  are  re- 
served to  the  states,  were  transferred  from  the  states  to  the 
commonwealth.  It  was  fully  recognized  that  the  discharge  of 
these  functions  would  necessitate  large  federal  expenditure;  but 
it  was  not  believed  that  this  transfer  of  expenditure  would  be,  at 
first  at  least,  at  all  commensurate  with  the  transfer  of  rev- 
enue. Consequently  there  was  inserted  in  the  constitution  a 
provision  for  the  repayment  to  the  states  of  any  surplus  fed- 
eral revenue.  The  principles  which  should  govern  the  al- 
location of  revenues  according  to  this  clause,  as  well  as  under 
the  Braddon  clause,  were  set  forth  in  a  special  section  of  the 
constitution,  which  was  to  remain  in  force  for  five  years  and 
thereafter,  until  changed  by  Parliament.  This  embodied  what 
became  known  as  **the  bookkeeping  system."  Under  this 
scheme  each  state  was  to  be  credited  with  the  federal  revenue 
collected  in  respect  of  that  state,  and  to  be  debited  with  the 
expenditure  incurred  on  its  behalf  in  connection  with  the 
transferred  departments  as  well  as  with  its  share,  on  a  per 
capita  basis,  of  the  new  expenditure  of  the  conunon wealth. 
It  was  also  provided  that  the  duties  chargeable  on  goods  im- 
ported into  one  state  and  consumed  in  another  should  be 
credited  to  the  consuming  state,  on  the  theory  that  the  duty 
ultimately  falls  upon  the  consumer.  The  balance  in  favor  of 
any  state  is  payable  monthly  by  the  commonwealth. 

Finally,  another  special  clause  (section  96)  of  the  constitution 
provided  that  the  Conunonwealth  parliament  might  grant  finan- 
cial assistance  to  any  state  on  such  terms  and  conditions  as  the 
parliament  should  think  fit.  This  section  was  introduced  with 
the  object  of  rendering  the  constitution  more  elastic  in  the  mat- 
ter of  assistance  to  the  states  than  it  would  have  been  if  the 
Braddon  clause  and  the  bookkeeping  system  were  rigidly 
adhered  to.  No  claim  for  such  special  assistance  has,  however, 
yet  been  made. 

So  far  as  the  Braddon  clause  is  concerned,  it  may  be  said  that 
for  some  time  it  worked  fairly  well,  although  with  every  year 
the  situation  became  more  embarrassing  in  the  separate  states, 
for  the  reason  that,  in  making  up  their  budgets,  it  was  prac- 
tically impossible  to  forecast  for  the  immediate  future  what 
would  be  the  share  of  each  state  in  any  particular  federal  tax. 
Moreover,  the  one-fourth  revenue  assigned  to  the  federal  gov- 


RECENT  REFORMS  IN  TAXATION 


537 


emment  gradually  proved  to  be  madequate  for  its  expenses.  At 
first  the  commonwealth  returned  to  each  state  not  only  the 
three-fourths  due  it,  but  a  substantial  balance  in  addition.  By 
1908,  however,  not  only  had  the  growing  expenses  of  the  com- 
monwealth swallowed  up  the  whole  of  the  one-fourth,  so  that 
there  was  no  balance  to  be  returned  to  the  states,  but 'the  one- 
fourth  itself  was  now  inadequate.^ 

This  contingency  was  foreseen  several  years  before  it  arose 
and  attempts  were  made  to  find  some  satisfactory  way  out  of 
the  diflSculty.    Repeated  conferences  were  held  by  the  premiers 
of  the  several  states,  but  it  was  not  until  1909  that  an  agreement 
was  reached.    Meanwhile  the  matter  had  become  particularly 
urgent,  because  of  the  decision  that  the  federal  government 
should  assume  all  the  state  debts.    The  agreement  between  the 
mmisters  of  the  commonwealth  and  of  the  states  was  to  the 
effect  that  the  commonwealth  should  retain  all  of  the  customs 
and  excise  revenues,  and  that  it  should  pay  over  to  the  states 
a  definite  sum  every  month,  computed  at  the  rate  of  £1  5s.  per 
annum  per  head  of  population.      In  view,  however,  of  the 
heavy  obligations  incurred  by  the  commonwealth  in  the  pay- 
ment of  old-age  pensions,  provision  was  made  for  withholding 
from  the  actual  shortage  in  the  revenue  the  sums  returnable  to 
the  states  during  that  year,  with  an  adjustment  as  between  the 
pension  states  and  the  non-pension  states.    Finally,  because  of 
the  large  per  capita  contribution  of  Western  Australia  to  the 
customs  revenue,  there  was  granted  to  that  state  an  additional 
special  annual  payment:  this  was  to  be  £250,000  the  first  year 
and  was  to  diminish  by  £10,000  annually  thereafter.    One-half 
of  this  allotment  to  Western  Australia  was  to  be  deducted  from 
the  shares  of  the  other  states. 

'  This  is  apparent  from  the  following  figures: 


YEAR 


1901-02 
1902-03 
1903-04 
1904-05 
1905-06 
1906-07 
1907-08 
1908-09 
1909-10 


NET  REVENUE 

CUSTOMS  AND 

EXCISES 


I 


£ 

8,633,996 

9,413,442 

8,844,195 

8,543,310 

8,739,298 

9,386,097 

11,368,220 

10,573,860 

11,323,207 


ONE-FOURTH 

ASSIGNED  TO 

COMMONWEALTH 


£ 

2,158,499 
2,353,110 
2,211,049 
2,135,827 
2,184,825 
2,346,524 
2,842,055 
2,643,465 
2,830,801 


NEEDED  FOR 
COMMONWEALTH 
EXPENDITURE 


£ 

1,269,757 
1,207,876 
1,465,716 
1,400,541 
1,354,915 
1,540,523 
2,511,315 
2,643,465 
2,830,801 


BALANCE 
RETURNED 
TO  STATES 


£ 

888,742 
1,145,234 
745,333 
735,286 
829,910 
806,001 
330,740 

nU 

nil 


538 


ESSAYS  IN  TAXATION 


If 


I 


f 


^aJt\  .  embodying  this  agreement  was  parsed  in  December. 
lUUy,  to  take  effect  as  an  amendment  to  the  constitution:  but 
the  amendment  wa^  rejected  by  the  electors  at  a  referendum  in 
April,  1910.  It  therefore  devolved  on  the  federal  parliament  to 
settle  the  question  by  law,  and  a  few  months  later  the  Surplus 
Kevenue  Act  was  passed,  which  embodied  practically  the  same 
provisions,  and  which  is  now  in  force.^  By  the  terms  of  this  act 
the  commonwealth  undertook  during  the  period  of  ten  years 
commencing  July  1, 1910,  and  thereafter  until  parhament  should 
otherwise  provide,  to  pay  to  each  state,  or  to  apply  to  the  pay- 
ment of  interest  on  the  state  debts  assumed  by  the  common- 
wealth an  annual  sum  of  25s.  per  capita.  The  state  of  Western 
Australia  was  to  receive  an  additional  sum  amounting  in  the 

t^^V^T^""  ^f^'T  ^^^  di°^i^i«hing  in  each  succeeding  year 
by  £10  000  and  one-half  of  these  payments  was  to  be  deducted 
proportionately  from  the  amount  payable  to  all  the  states. 
Any  surplus  revenue  in  the  federal  treasury  at  the  end  of  any 
year  was  to  be  turned  over  to  the  several  states,  and  for  the  year 
1911  the  conamonwealth  was  authorized  to  deduct  from  the 
amount  payable  to  the  states,  the  estimated  deficit  in  the  fed- 
eral budget  figured  at  £450,000.  In  the  same  federal  election  in 
which  the  fiscal  amendment  to  the  constitution  was  rejected, 
the  provision  to  have  the  commonwealth  assume  all  the  debts 
incurred  by  the  states  was  adopted. 

VIII.  Conclusion 

The  foregoing  survey  of  the  tax  reforms  in  England,  Germany 
and  Australasia  appears  to  justify  certain  general  conclusions- 

First  and  foremost,  attention  is  to  be  directed  to  the  great 
development  of  the  income  and  inheritance  taxes,  with  the 
adoption  of  the  modern  principles  of  progression  and  of  differen- 
tiation of  taxation.  In  this  respect,  as  we  have  seen,  England 
has  taken  the  lead,  although  Germany  follows  closely  in  the 
income  tax,  and  Australasia  in  the  inheritance  tax.  In  Germany 
the  effort  to  round  out  the  system  of  direct  taxes  by  the  inherit- 
ance tax  has  thus  far  been  only  partially  successful;  while  in 
Australasia  where  the  inheritance  taxes  were  the  first  to  be 
adopted,  the  income  ta^  is  for  the  most  part  levied  on  a  scale 
somewhat  similar  to  that  in  England.    The  growth  of  the  taxa- 

0/  Ztm/?«  ''/S.t*/^  M  ^,k"  ^"  ^^'  ^^'^^  ^"^^  ^^^  'f  ^  Commonwealth 
oj  Amlratm,  1901-10,  Melbourne,  1911,  p.  800. 


f  I 


RECENT  REFORMS  IN  TAXATION  539 

tion  of  incomes  and  inheritances  is  the  most  significant  aspect  of 
the  endeavor  to  realize  the  principle  of  ability  in  taxation 

Second  in  importance  is  the  development  of  the  land  taxes  and 
more  especially  of  the  taxes  on  land  values.    Here,  as  we  have 
seen,  Australasia  was  really  the  first  in  the  field,  with  Germany 
next  and  England  following  closely.     But  in  Australasia  the 
movement  has  been  primarily  toward  the  exemption  of  improve- 
ments from  taxation,  coupled  with  a  progressive  tax  on  land  for 
social  rather  than  for  fiscal  reasons.    In  Germany,  on  the  other 
hand,  the  significant  tendency  has  been  in  the  direction  of  the 
taxation  of  the  so-called  unearned  increment  of  land,  first  by  the 
towns,  and  more  recently  by  the  empire.     England  has  gone 
further  than  either  of  the  other  countries  in  that  it  combines  with 
the  increment-value  duty  a  tax  on  so-called  undeveloped  land. 
In  none  of  these  cases,  however,  should  the  significance  of  the 
land  taxes  be  misapprehended.     Far  from  constituting  an  at- 
tempt to  apply  the  principles  of  the  single  tax,  as  is  often  erro- 
neously asserted,  the  movement  aims  rather  to  realize  more  fully 
the  principles  of  ability  to  pay  by  emphasizing  the  production 
rather  than  the  consumption  side  of  the  doctrine  of  faculty.^ 
Not  only  is  the  fiscal  importance  of  these  land  taxes  everywhere 
a  minor  consideration  but,  as  I  have  pointed  out,  the  real  signifi- 
cance of  the  state  land  taxes  in  England  and  Germany  and  of  the 
local  land  taxes  in  Australasia  is  to  be  found  in  the  endeavor  to 
substitute  for  the  old  and  discredited  method  of  taxing  land 
according  to  rental  value  the  newer  method  of  taxing  land 
according  to  capital  or  selling  value.    The  old  system  gave  an 
unjust  advantage  to  the  land  speculator  and  was  largely  re- 
sponsible for  the  congestion  of  population  in  the  towns.     The 
new  system  is  an  attempt  to  make  the  landowner  bear  his  proper 
share  of  the  public  burdens. 

The  third  point  to  be  emphasized  is  the  importance  that  is 
still  attached  to  indirect  taxes.  In  England,  as  we  have  seen, 
the  additional  revenue  that  has  been  provided  by  the  recent 
tax  reforms  has  come  equally  from  direct  and  indirect  taxes. 
In  Germany  far  greater  stress  has  been  put  upon  the  indirect 
than  upon  the  direct  taxes;  and  in  Australasia  the  overwhelming 
mass  of  the  total  revenue,  federal  and  state,  is  still  derived 
trom  the  customs  and  excises. 

These  facts  indicate  not  only  the  fallacy  of  the  claim  that 
there  is  any  tendency  toward  a  single  tax  on  land,  but  also 

*  Cf.  supra,  p.  341. 


540 


ESSAYS  IN   TAXATION 


I 


'fil 


i 


^ 


the  incorrectness  of  the  assertion  that  the  revenue  of  modern 
states  must  be  derived  chiefly  from  direct  taxes.  A  careful 
study  of  the  evidence  leads  us  to  the  contrary  conclusion,  and 
shows  that  there  must  be  some  fundamental  explanation  of 
the  persistence  of  indirect  taxes.  This  is  not  the  place  to  at- 
tempt such  an  explanation — which,  it  may  be  said  in  passing, 
is  not  given  in  any  of  the  current  treatises  on  finance.  The 
outlines  at  least  of  such  an  explanation  may  be  found  in  the 
suggestion  that  direct  taxes,  based  on  the  principle  of  faculty 
or  ability  to  pay,  respond  to  the  individual  element  in  the  prob- 
lem of  taxation,  while  indirect  taxes,  which  cannot  be  explained 
on  any  such  principle  of  individual  ability,  correspond  to  the 
no  less  important  social  element.^  Whatever  may  be  thought 
of  this  suggestion,  and  whatever  limits  it  may  be  necessary  to 
posit  in  the  elaboration  of  a  system  of  indirect  taxes,  it  is  none 
the  less  true  that  no  explanation  of  the  existing  facts  of  tax 
reform  will  hold  if  it  fails  to  appreciate  the  important  place  that 
is  to  be  assigned  in  the  future,  as  well  as  in  the  present,  to  in- 
direct taxes,  side  by  side  with  the  direct  taxes. 

The  fourth  conclusion  is  the  increasing  importance  which  is  to 
be  attached  to  a  study  of  the  relations  between  central  and  local 
finance,  both  as  between  national  and  state,  and  as  between 
state  and  communal  finance.  Our  survey  discloses  several  im- 
portant tendencies.  First  to  be  noted  is  the  provision  for  new 
and  independent  sources  of  federal  revenue,  as  in  Australia 
with  the  land  tax,  and  in  Germany  with  the  land  tax,  the  in- 
heritance tax  and  the  suggested  federal  tax  on  possessions.  In 
the  second  place,  we  notice  the  gradual  transfer  of  state  taxes 
to  the  federal  government,  as  regards  not  only  the  administra- 
tion, but  also  the  yield.  Thus  in  Australasia  the  customs  and 
revenue  taxes  are  assigned  to  the  federal  government;  while 
in  Germany  some  of  the  state  excises  as  well  as  the  state  in- 
heritance taxes  are  transferred  to  the  federal  government,  and 
the  land  increment  taxes  are  at  least  to  be  controlled  by  the  im- 
perial authorities.  In  the  third  place,  we  observe  that  the  taxes 
collected  by  the  central  government  are  distributed,  in  part  at  all 
events,  among  the  states  and  even  in  some  cases  among  the 
localities.  Not  to  speak  of  the  English  system  of  grants  in  aid, 
we  find  in  Australasia  a  distribution  of  surplus  revenues  among 
the  states  and  in  Germany  an  apportionment  of  the  inheritance 
tax  as  between  empire  and  states  and  the  distribution  of  the  new 

*  Cf.  supra,  chap,  ix,  p.  324. 


RECENT  REFORMS  IN  TAXATION 


541 


land  taxes  among  empire,  states  and  localities.  More  and  more 
the  fiscal  problem  is  being  envisaged  as  a  totality,  and  the 
relative  claims  of  the  community,  state  and  central  governments 
are  being  considered  from  the  point  of  view  of  an  equitable  dis- 
tribution of  the  entire  burden  resting  upon  the  individual  or  the 
class.  This  is  the  most  recent  phase  of  modern  tax  reform,  and 
for  this  reason  doubtless  it  has  hitherto  received  the  least  study. 
It  is,  however,  perhaps  the  most  distinctive  aspect  of  the  modern 
movement. 

Summing  up  all  these  conclusions  we  see  that  modern  tax 
reform,  as  illustrated  in  these  three  great  nations,  presents  a 
combination  of  social  and  fiscal  considerations;  or  rather,  that 
an  attempt  is  being  made  to  solve  the  fiscal  problem  with  due 
regard  to  the  social  aspects  of  the  situation.  If  it  be  inquired 
what  lessons  these  movements  contain,  so  far  as  the  United 
States  is  concerned,  it  would  probably  not  be  far  amiss  to 
state  them  as  follows: 

In  the  first  place,  so  far  as  indirect  taxation  is  concerned, 
the  United  States  has  not  much  to  learn  from  this  recent  develop- 
ment. Almost  the  entire  revenue  of  the  federal  government 
is  derived  from  indirect  taxes,  and  in  some  of  our  leading  com- 
monwealths not  a  little  revenue  is  drawn  from  similar  sources. 
Taking  public  revenues  as  a  whole  in  the  United  States,  the 
balance  between  direct  and  indirect  taxes  is  fairly  well  main- 
tained, and  there  is  not  much  need  or  likelihood  of  any  great 
alteration  in  their  present  proportions. 

Secondly,  so  far  as  the  land  taxes  are  concerned,  the  United 
States  again  has  not  much  to  learn  from  the  recent  development 
abroad.  As  we  have  seen,  the  system  of  land  taxation  in  the 
United  States  is  superior  to  that  found  anywhere  else.  Whether 
by  accident  or  as 'a  result  of  economic  conditions,  it  is  based 
on  the  capital  or  selling  value  of  the  land,  combined  with  the 
sj^stem  of  special  assessments  for  particular  improvements. 
Neither  of  these  systems,  as  we  have  seen,  is  accepted— at  all 
events,  neither  is  developed  in  anything  like  the  same  degree — 
in  England,  in  Germany  or  in  Australasia,  and  the  movement 
for  the  imposition  of  land  taxes  in  those  countries  is,  on  the 
whole,  nothing  more  than  an  attempt  to  reach  the  position 
that  has  long  been  occupied  by  the  United  States.  It  is  possible 
that  our  American  system  may  be  supplemented,  by  a  small 
tax  on  the  so-called  unearned  increment;  and  it  is  also  pos- 
sible that  in  certain  portions  of  the  country  a  partial  or  a 


<J         ' 


542 


ESSAYS  IN  TAXATION 


complete  exemption  of  improvements  from  the  land  tax  may 
be  found  desirable.  But  in  many  other  portions  of  the  country 
both  of  these  projected  changes  will  be  found  to  be  either 
unnecessary  or  undesirable.  Thus  in  the  main  we  may  regard 
with  equanimity  the  present  situation  of  the  taxation  of  land  in 
the  United  States,  as  compared  with  that  of  the  rest  of  the 
world. 

In  the  third  place,  so  far  as  inheritance  taxes  are  concerned, 
the  United  States  is  rapidly  approaching  the  practice  that  is 
found  abroad.  In  some  of  our  more  progressive  American 
states  this  form  of  taxation  has  already  been  well  developed;  in 
others  the  movement  is  well  under  way,  so  that  here  also  no 
especial  lesson  need  be  emphasized. 

It  is  on  the  two  remaining  points  that  the  chief  emphasis 
is  to  be  laid.  Income  taxation  in  the  United  States  is  only  in  the 
very  first  stages  of  development.  What  has  been  successfully 
accomphshed  in  England,  in  Germany  and  in  Australasia,  is,  foV 
the  most  part,  only  in  the  stage  of  discussion  in  the  United 
States.  A  study  of  the  recent  reforms  of  taxation  in  the  rest  of 
the  world  cannot  fail  to  compel  the  conclusion  that  the  near 
future  has  in  store  for  the  United  States  some  form  of  income 
taxation. 

Finally,  and  above  all,  we  are  led  to  the  conclusion  that  for 
the  next  few  decades  in  the  United  States  the  most  pressing  ques- 
tion is  to  be  that  of  the  relations  of  federal,  state  and  local  fi- 
nance. Scarcely  a  single  problem  connected  with  the  more  im- 
portant direct  taxes  can  be  attacked,  with  any  hope  of  successful 
solution,  without  a  consideration  of  these  important  relations. 
That  England,  Germany  and  Australasia  should  all  of  them  be 
devoting  so  much  attention  to  this  series  of  questions  is  a 
significant  sign  of  the  times,  and  from  the  discussions  carried 
on  and  conclusions  arrived  at  in  these  and  other  foreign  countries 
we  may  hope  to  gain  some  light  as  to  the  disposition  to  be  made 
m  the  not  distant  future,  of  the  income  tax,  the  inheritance 
tax  and  the  corporation  tax  in  the  United  States.  The  economic 
forces  which  are  making  the  whole  world  akin  are  everywhere  in- 
fluencing taxation.  With  the  increasing  similarity  in  the  con- 
ditions of  economic  life,  it  is  not  unreasonable  to  expect  greater 
correspondence  in  the  fiscal  systems. 


\ 


CHAPTER  XVIII 

BECENT  LITERATURE   IN   TAXATION 

In  some  respects  the  most  significant  fact  of  the  recent  de- 
velopment of  economic  thought  is  its  growing  international 
character.  Not  only  does  the  modern  economist  find  it  neces- 
sary to  draw  his  facts  from  a  wider  field  than  that  of  his  own 
country;  but  if  he  desires  to  keep  abreast  of  the  advances  in  the- 
ory he  also  finds  it  incumbent  on  him  to  read  many  languages 
and  to  note  the  movements  in  widely  distant  countries.  In  no 
domain  is  this  more  true  than  in  the  science  of  finance.  In  the 
following  pages  an  attempt  will  be  made  to  run  hurriedly  over 
the  productions  of  the  period  from  1885  to  1900  and  in  a  general 
way  to  outline  their  value  to  the  English-speaking  student. 

I.  Germany 

There  are  two  methods  of  writing  economic  works.  One  is 
essentially  historical  and  descriptive,  givmg  an  account  of  the 
past  and  of  the  actual  state  of  legislation  and  of  methods,  and 
attempting  to  draw  therefrom  a  statement  of  the  underlying 
principles;  the  other  is  primarily  abstract  and  deductive,  making 
little  use  of  history  and  of  facts,  but  endeavoring  to  reach  con- 
clusions from  well-defined  principles.  The  modern  German 
writers  on  the  science  of  finance  had  for  some  time  devoted 
themselves  almost  exclusively  to  the  first  method;  but  more 
recently  a  partial  revulsion  of  feeling  was  indicated  by  the 
appearance  of  several  works  which  attempted  to  avoid  the  exag- 
gerations of  the  extreme  historical  school,  and  to  take  refuge  once 
again  in  purely  theoretic  discussion.  For  Germany,  this  was  a 
salutary  reaction,  because  of  the  comparative  discredit  into 
which  pure  theory  had  fallen. 

The  Handbook  of  the  Science  of  Finance  by  Professor  Um- 
pfenbach  ^  is,  strictly  speaking,  not  a  new  work.    But  as  the 

1  Lehrbuch  der  Finanzwissenschaft.  Von  Dr.  Karl  Umpfenbach,  o.  5. 
Professor  der  Staatswissenschaften  an  der  Universitat  Konigsberg.  Zweite 
Auflage.    Stuttgart,  1887. 

543 


'  » 


■■liisgiiljiiciajjMwi'ii' 


544 


ESSAYS  IN  TAXATION 


RECENT  LITERATURE  IN   TAXATION 


545 


I  I 


first  edition  appeared  well-nigh  half  a  century  ago,  and  as 
some  notable  additions  have  been  made  to.  the  present  volume, 
it  may  be  discussed  as  practically  a  new  publication.  The  first 
edition  was  pubUshed  just  before  the  current  toward  historical 
economics  had  set  in  strongly;  the  second  edition  appeared  just 
after  the  tide  has  begun  to  ebb.  There  are  hence  almost  no 
vestiges  of  the  inductive  treatment.  In  fact,  the  strong  points 
of  the  work  are  the  rigor  of  the  theoretic  discussions  and  the 
precision  of  the  definitions. 

The  general  tone  of  the  book  is  conservative.  The  author 
opposes  the  further  industrial  activity  of  the  state,  even  in  such 
domains  as  that  of  railroads;  he  has  nothing  but  ridicule  for 
the  idea  of  the  income  tax  in  practical  life;  he  declares  that  the 
question  of  progression  does  not  belong  to  the  science  of  finance 
at  all,  because  it  involves  communistic  changes  of  property. 
These  contentions  are  interesting  as  giving  the  work  the  charac- 
teristics of  the  contemporary  French  rather  than  of  the  modern 
German  authorities.  As  a  matter  of  fact,  they  exerted  no  in- 
fluence on  German  practice. 

A  more  important  point  in  Umpfenbach's  book  is  method- 
ology. The  common  division  of  public  revenues  by  French 
writers  Hke  Leroy-Beaulieu  is  into  domains,  industrial  under- 
takings and  taxes,  corresponding  to  Adam  Smith's  old  division 
into  revenue  from  public  lands,  from  public  stock  and  from  taxes. 
The  German  writers,  on  the  other  hand,  early  saw  this  division 
to  be  inadequate  and,  as  we  know,  added  another  category,  fees. 
The  exact  definition  of  fees,  however,  has  always  been  a  mooted 
point;  and  few  writers  agree  exactly  on  the  distinction  between 
fees  and  taxes.  Umpfenbach  defines  fees  as  ''special  payments 
for  the  cost  of  a  financial  transaction,  in  so  far  as  it  is  necessary 
for  political  purposes,  and  in  so  far  as  the  expenses  surpass  those 
which  it  would  be  permissible  to  lay  on  the  community  as  such." 
Passing  over  the  minor  infelicities  of  expression,  we  may  say 
that  at  all  events  it  conveys  a  precise  meaning. 

Had  Umpfenbach  rested  here,  his  book  would  have  rendered 
a  substantial  service  to  the  clearing  up  of  ideas.  But  he  adds 
to  his  three  categories  of  fees,  taxes  and  domains  a  fourth  cate- 
gory of  fiscal  (or  lucrative)  prerogatives,  which  are  defined  as 
"  compulsorily  reserved,  exclusive  rights  of  the  state  over  speci- 
fied kinds  of  property  rights."  The  foundation  of  this  fourth 
category  is  to  be  found  in  the  mediaeval  regalia;  but  Umpfen- 
bach makes  it  now  include  such  widely  diverse  revenues  as 


■I  !'l 


the  poll  tax,  taxes  on  communication,  on  the  transfer  of  prop- 
erty, on  legacies  and  successions,  revenue  from  treasure-trove, 
from  mines,  salt,  tobacco,  spirits  and  bank  monopolies,  and 
finally  from  licenses.  He  lays  great  emphasis  on  this  divi- 
sion; in  fact,  it  is  the  thread  which  runs  through  the  whole  work. 
But  the  only  result  of  its  adoption  would  be  undue  restriction 
of  the  field  of  taxation,  and  an  increased  confusion  as  to  the 
exact  nature  of  taxes.  What  he  gains  by  the  separation  of  fees 
from  taxes,  he  loses  by  the  separation  of  taxes  from  fiscal  prerog- 
atives. His  methodological  explanation  will  not,  on  the  whole, 
commend  itself  to  students  of  finance. 

Much  the  same  class  of  questions  is  treated  by  Professor 
Neumann  in  his  work  entitled  Taxation.^  Neumann  is  well 
known  as  one  of  the  prominent  modern  writers  on  finance.  His 
book  on  Die  progressive  Einkomrnensteuer  remains  one  of  the 
best  works  on  that  knotty  subject;  and  in  that,  as  in  all  his 
earlier  writings,  is  to  be  found  a  rich  fund  of  historical  and 
statistical  information.  In  this  newer  work,  however,  Neumann 
has  undertaken  to  analyze  in  detail  the  nature  of  taxation.  The 
first  volume,  the  only  one  that  has  yet  appeared,  is  introductory 
and  to  a  great  extent  methodological.  The  twelve  chapters 
treat  mainly  of  four  topics:  classification  of  public  revenues, 
fees  versus  taxes,  the  principle  of  public  interest,  and  direct  versus 
indirect  taxes.  In  the  discussion  of  these  points  the  author 
shows  great  acuteness  and  dialectic  skill;  yet  three  criticisms 
can  be  made.  The  discussion  is  too  minute,  and  often  borders 
on  the  wearisome;  the  style  is  anything  but  clear;  and  the  con- 
clusions are  not  advanced  with  the  necessary  precision. 

After. criticising  the  usual  method  of  classification,  Neumann 
defines  fees  as  payments  for  special  services  of  the  state  or  the 
community,  so  far,  but  only  so  far,  as  the  public  interest  is 
involved.  This  would  include  the  tolls  of  roads,  canals,  railways 
and  telegraphs,  but  would  exclude  the  revenues  from  fiscal  mo- 
nopolies. He  devotes  over  two  hundred  pages  to  the  discussion 
of  public  interest,  and  finally  defines  it,  but  in  so  characteristic 
a  manner  that  it  must  be  given  in  the  original : — 

"  Oeffentliches  Interesse  im  Cobjectiven)  engeren  Sinne  ist  ein  auf 
menschliche  Handlungen  odor  Werke  beziigliches  Interesse  von  Zielen 

*  Die  Steuer.  Erster  Band.  Die  Steuer  und  das  Offentliche  Interesse. 
Eine  Unlersuchung  liber  das  Wesen  der  Steuer  und  die  Gliederung  der  Staats- 
und  Gemeinde-Einnahmen.    Von  Fr.  J.  Neumann.    Leipzig,  1887. 


546 


ESSAYS  IN  TAXATION 


If 


i' 
If 


gung  von  Opfem  nach  herrschendcr  Annahme  gerechtfertigt  ist." 
In  other  words,  two  hundred  pages  are  devoted  to  proving  that 
a    public  mterest  is  an  interest  of  such  importance  aTtoTustify 
a  sacrifice  on  the  part  of  the  individual."    This  might  sure  v 

thJforrdat"""  '"^  'r  ''T  ^'^^  '^""^^«'  pages,  TifdliS 
the  formidable  array  of  proofs  and  counter-proofs,  of  exceptions 

^t:^r%Tr  "'""  '""'?^  """''  the'book'and  beS 

be  superfdal    f„^  T'*'^'*  ■'  P^*""  ^^  ^'^'  ^  '"'^take  as  to 

Much^tt  '  K^'f"  "^'^"^  ■'  *P*  *°  ^««"'t  'n  confusion. 

dir!.r    ^     ^- '  ^'^  d'««"««'««  of  the  four  methods  of  cla.ssifying 

Jarieu-rlS'''  l"""'-  u  ^^'."'"^  «»^"y  ^'«-  himself  to 
Faneu  s  method,  makmg  the  distinction  depend  on  the  perma- 
nence or  penodicity  of  the  act.  Other  parls  of  the  LkX 
71 V7"  """f '''''''  ^'  ^°^  ■'^t^''^'  his  discussion  of  £  re la- 

down  to  one-fifth  of  its  present  compass.  Questions  of  metho- 
dology are  not  the  all-absorbing  ones. 

The  same  criticism  can  certainly  not  be  urged  in  the  case  of 
the  new  volume  of  Wagner's  Science  of  FiLnce  •     The  Irst 
volumes  of  this  great  work  are  familiar  to  all  sTudents.    Wagn^ 
started  out  over  three  decades  ago  with  the  idea  of  pubE 
a  new  edition  of  Rau's  finance,  but  soon  found  his  difference! 

lrwSio?Xr.'r  ^  ?"  '"^  ^  "^^  ereation,1Sr 
L^tK  T^  ^'^  ^'^^  volumes  of  the  work  appeared  years 

^fr" .  !k''"°"1  "^  ^^-    T*''^  tf-ird  volume  deris  not  Zh 

practTce  ofT'  ^^  ^'^^T'^'"'  "l"^^*'""^  ''"^  ^^e  histoo^Tnd 
practice  of  taxation.     Unfortunately  Wagner's  plan  was  so 

comprehensive,  and  his  method  so  productive  of  repetitioras  to 
make  the  completion  of  the  work  doubtful.  In  fac  as  H  pr^- 
Slv 'r'""*r'^  '"^  continually  greater  details  whTh 
ilthat  ft  hiff'';"  '''r  T'^ '"  ^  cyclopedia.  The  consequence 
InH  VhVtK  »,  r  '""i/"''  y^^'"  **»  ^^  *•>«  third  volume, 
Frlit      ^'  ^^^"  ^^'?  *°  ^'^""^^  the  present  condition  of 

first  part  o  this,  much  enlarged,  appeared  in  a  second  eS\  1910  un^r 
the  table  of  SteuergeechKhte  vom  Altertum  bis  zur  GegJwaH 


RECENT  LITERATURE  IN  TAXATION 


547 


scarcely  foresee  the  time  when  the  work  will  be  finished.  This 
is  the  more  to  be  regretted  because  the  systems  of  France  and  of 
England  have  already  been  made  familiar  to  us  by  other  good 
publications,  while  the  condition  of  the  remaining  countries, 
which  he  has  not  yet  fully  treated,  is  far  from  being  equally 
well  known.  1  It  is  to  be  hoped  that  the  work  will  not  be  left  a 
torso.  The  present  volume  requires  no  especial  commentary 
beyond  the  statement  that  in  all  his  details  of  the  history  and 
practice  of  taxation,  as  well  as  in  his  general  summaries  of  the 
French  and  English  systems,  Wagner  remains  true  to  the  ideas 
advanced  in  the  former  volumes.  He  has  continually  in  mind 
the  demands  of  what  he  calls  the  socio-political  principles— the 
principles  whereby  the  government  is  looked  up  to  as  the  regu- 
lator of  the  distribution  of  wealth,  and  taxation  is  regarded  as 
an  engine  to  redress  inequalities  of  fortune.  Much  as  we  may 
dissent  from  the  fundamental  points  of  Wagner's  general  posi- 
tion, it  must  be  conceded  that  he  has  developed  his  doctrines 
with  consummate  keenness  and  phenomenal  learning,  and  that 
his  Science  of  Finance,  even  though  incomplete,  still  stands  at 
the  head  of  financial  literature  for  the  suggestiveness  of  its  views 
and  the  wealth  of  its  contents. 

Professor  Cohn's  Science  of  Finance  ^  is  constructed  on  an 
entirely  different  method.  It  forms  the  second  volume  of  the 
general  System  of  Political  Economy,  the  opening  volume  of 
which  was  published  several  years  before.  After  a  general  intro- 
duction on  the  nature  and  history  of  the  science  of  finance,  the 
first  book  treats  of  the  essence  of  government  economy  or  of  the 
public  household,  dealing  with  public  functions,  pubUc  expendi- 
tures, the  history  and  development  of  pubhc  revenue,  and  the 
budget.  The  second  book  discusses  the  principles,  history  and 
actual  systems  of  taxation.  The  third  book  is  devoted  to  a 
presentation  of  German  taxation.  Finally,  a  fourth  book  treats 
of  pubHc  credit. 

The  chief  interest  of  the  work  lies  in  the  first  book  and  in  the 
first  chapter  of  the  second  book.  The  remainder  of  the  volume 
is  always  interesting,  as  are  all  of  Cohn's  writings,  but  it  contains 

^  The  fourth  volume,  devoted  to  the  details  of  German  taxation  ap- 
peared in  two  parts  in  1899  and  1901. 

2  System  der  Finanzivissenschaft.  Ein  Lesehuch  fur  Studierende.  Von 
Gustav  Cohn,  ord.  Prof,  der  Staatswissenschaften  an  der  Universitat  Got- 
tingen.    Stuttgart,  1889. 

The  Science  of  Finance.  By  Gustav  Cohn.  Translated  by  T.  B.  Veblen. 
Chicago,  1895. 


1 4 


548 


ESSAYS  IN  TAXATION 


RECENT  LITERATURE  IN  TAXATION 


549 


I 


^ 


nothing  that  can  be  called  a  real  contribution  to  financial  science. 
He  is  indeed,  through  his  intimate  acquaintance  with  Swiss 
financial  methods,  often  enabled  to  illustrate  certain  principles 
more  successfully  than  any  of  his  predecessors,  but  in  the  main 
he  follows  the  rather  conservative  lines  of  accepted  views.  The 
book  on  German  taxation  gives  an  excellent  picture  of  the  pres- 
ent situation,  but  is  omitted  in  the  translation.  The  chapters 
on  public  credit  contain  an  admirable  historical  survey,  but  in 
matter  of  principle  do  not  afford  anything  which  cannot  be 
found  at  least  equally  well  said  in  Professor  Adams'  work. 

It  is  otherwise  with  the  discussion  of  the  general  princi- 
ples of  finance;  for  Cohn's  treatment  of  the  various  kinds  of 
public  contributions  marks  a  distinct  advance.  His  classi- 
fication of  public  revenues,  although  not  completely  satis- 
factory, is  based  upon  an  analysis  of  comparative  private  and 
public  benefits,  and  is  elucidated  by  some  suggestive  remarks. 
His  description  of  the  historical  development  of  public  econ- 
omy is  clearer  than  that  of  Roscher,  and  traces  the  chief  lines 
of  development  with  a  master-hand.  His  short  discussion  of  the 
principles  of  local  finance  is  especially  welcome  when  compared 
to  the  laborious  and  confused  chapters  to  be  found  in  other 
treatises. 

Most  striking  is  his  treatment  of  the  equities  of  taxation. 
Cohn  shows  that  just  as  the  accepted  ideas  of  justice  are  a 
product  of  historical  evolution,  so  the  conception  of  just  taxa- 
tion has  assumed  a  different  form  in  every  stage  of  human 
progress.  He  gives  a  sketch  of  the  different  ideas  that  swayed 
the  public  mind  at  various  epochs,  and  then  devotes  himself 
in  particular  to  a  consideration  of  progressive  taxation.  The 
result  of  the  discussion  is  the  adoption  of  the  principle  of  pro- 
gression, not  for  Wagner's  socio-political  reasons,  but  simply 
because  under  modern  conditions  proportional  taxation  no 
longer  corresponds  to  taxable  capacity.  Cohn  seeks  to  define 
and  to  limit  the  principles  of  progression,  and  in  connection  with 
this  gives  a  good  history  of  the  doctrine  of  the  *' minimum  of 
subsistence." 

Weak  points  are  not  lacking  as,  for  instance,  in  his  dis^ 
cussion  of  the  incidence  of  taxation.  Here,  as  in  many  other 
places,  Cohn  conceals  the  difficulties  of  the  problem  by  the 
brilliancy  of  his  style.  As  this  brilliancy  is  entirely  absent 
in  the  translation,  the  work  has  by  no  means  received  so  favor- 
able a  reception  in  its  English  dress  as  it  did  in  the  original.    It 


will  have  served  our  purpose,  however,  to  call  attention  to  the 
points  in  which  Cohn's  book  marks  an  advance  on  its  prede- 
cessors. Wagner,  Roscher  and  Cohn  supplement  one  another. 
Wagner  is  more  radical  and  audacious  in  his  suggestions  and 
illustrates  his  theories  by  a  wealth  of  statistical  material; 
Roscher  is  weak  in  theory  but  strong  m  history;  Cohn  seeks 
to  keep  the  golden  mean.  Cohn's  Finance  is  superior  to  all 
others  in  two  respects,— in  clearness  of  style  and  in  philosophic 
breadth  of  view.  We  welcome  this  new  accession  to  economic 
literature  as  one  of  the  most  important  works  of  the  decade,  but 
very  much  fear  that  it  will  help  the  American  student  to  only 
a  slight  extent. 

A  more  recent  text-book  is  by  Dr.  Vocke.    As  this  is,  however, 
in  some  respects  simply  the  elaboration  of  an  earlier  work' 
we  shall  devote  a  few  words  to  its  predecessor.    In  this  former- 
work,  entitled  Contributions,  Imposts  and  Taxes, ^  Dr.  Vocke 
treats  the  subject  in  a  somewhat  peculiar  way.    After  having 
won  his  spurs  after   half   a   century   ago  by  his  History  of 
English  Taxation,  at  that  time  the  most  meritorious  work  on 
the  topic,  the  venerable  doctor  here  attempts  to  find  the  moral 
basis  and  relative  justification  of  the  various  taxes.    The  prob- 
lem which  he  sets  out  to  solve  is  that  of  the  exact  difference  be- 
tween direct  and  indirect  taxation;  and  the  conclusion  to  which 
he  comes  is  at  all  events  novel.    In  an  introductory  book  he 
traces  the  literary  doctrine  of  the  basis  of  taxation  in  general, 
and  divides  the  authors  into  three  schools:  the  representatives 
of  the  contract  or  protection  doctrine,  including  most  of  the 
earlier  English  and  French  works;  the  group  which  emphasizes 
the  sovereign  nature  of  the  state  and  the  duties  of  the  subject, 
but  without  any  deeper  historical  insight;  and  finally  the  socio- 
political writers,  who  like  Held,  Schaffle  and  Wagner,  attribute 
to  the  state  a  compensatory  duty  in  taxing  away  inequalities  of 
fortune.     Vocke  strongly  objects  to  the  latter  as  involving 
a  dangerous  socialistic  tendency,  and  asserts  that  such  consider- 
ations do  not  at  all  appertain  to  the  science  of  finance.    Neither 
in  these  schools,  however,  nor  in  the  works  of  the  "independent" 
writers,  like  Neumann,  Stein  and  Roscher,  does  he  find  an  answer 
to  the  great  question:  What  is  the  ethical  basis  of  direct,  as 
compared  with  indirect,  taxation? 

^Die  Abgaben,  Auflagen  und  die  Steuer,  vom  Standpunkte  der  Geschichte 
Stutt'l^'fm''^    Von  Dr.  Wilhelm  Vocke,  geheimer  Oberrechnungsrat. 


;"a^ 


[llh 


550 


ESSAYS  IN  TAXATION 


An  answer,  he  thinks,  is  possible  only  through  a  study  of  his- 
torical development.   With  characteristic  German  thoroughness, 
but  with  what  seems  unnecessary  detail,  Vocke  begins  with 
a  psychological  analysis  of  the  individual  and  traces  the  evolu- 
tion of  his  economic  condition  and  qualities  through  the  family 
and  tribe  to  the  state.    In  the  patriarchal  stage,  as  in  the  family, 
the  contributions  of  the  individual  to  the  support  of  the  whole 
are  compulsory,  universal  and  proportional  to  property.     In 
the  feudal  state  the  contributions  of  the  vassal  take  the  shape 
of  personal  services  and  of  payments  in  kind,  afterwards  con- 
verted into  money  payments.     Then  begin  the  customs  and 
duties,  the  fees  and  tolls,  the  excises  or  evil  duties  {mala  tolat), 
all  of  which  rest  primarily  upon  power— upon  the  imperious 
necessities  of  the  overlord.     The  legal  basis  is  the  princely 
prerogative,  the  irnperium;  in  other  words,  naked  force.    Quite 
different  from  these  veritable  impositions  are  the  taxes  proper. 
Beginning  as  the  tnnoda  necessitas,  aids  and  contributions,  they 
soon  develop  into  poll,  property,  and  finally  into  profit  taxes. 
These  taxes,  properly  so  called,  rest  on  voluntary  contributions, 
not  on  mere  force;  they  are  universal,  not  special;  their  standard 
is  personal  ability,  not  mere  expediency.    In  the  tax  there  is  a 
moral  quality,  in  the  customs  and  excises  there  is  none. 

This  is  the  keynote  of  Vocke's  book.  The  tax  proper  in 
its  historical  genesis  is  the  direct  tax,  and  connotes  certain 
ethical  ideas;  the  indirect  taxes  are  properly  not  taxes  at  all, 
but  imposts,  and  carry  with  them  no  moral  implication.  He 
makes  a  careful  study  of  the  development  of  indirect  taxation 
in  the  next  political  form— the  absolute  monarchy;  and  he 
shows  how  and  why  the  basis  of  direct  taxation  was  changed 
from  property  to  product.  The  remaining  two-thirds  of  the 
work  are  devoted  to  a  consideration  of  taxation  in  the  actual 
or  constitutional  state.  He  concludes  that  the  correct  point 
of  view  lias  been  won,  and  that  future  reform  must  proceed  in 
the  path  of  elaborating  the  direct  taxes  and  of  curtailing  the 
indirect  taxes. 

Vocke's  book  may  be  termed  a  study  in  the  philosophy  of 
tiixation.  It  contains  no  figures,  and  but  few  facts.  The 
author's  contention  as  to  indirect  taxation  may  be  met  by 
the  reflection  that  justice  cannot  be  the  sole  maxim  of  taxa- 
tion; for  the  chief  practical  consideration  is  to  balance  the 
budget,  and  some  taxes  which  are  technically  just  may  be 
practically  unremunerative  and  therefore  unserviceable.    More- 


RECENT  LITERATURE  IN  TAXATION 


551 


over,  Vocke  fails  to  perceive  that  there  are  various  kinds  of 
indirect  taxes,  and  that  many  of  the  imperfections  of  the  older 
systems  are  removable.  Yet,  on  the  whole,  he  will  serve  as  a 
useful  antidote  to  such  flimsy  thinkers  as  McCulloch,  who  ex- 
erted so  considerable  an  influence  on  English  views  on  taxation. 

In  his  later  book  entitled  The  Elements  of  the  Science  of  Fi- 
nance,^ which  constitutes  the  second  volume  of  Frankenstein's 
Hand-  und  Lehrhuch  der  Staatswissenschaften,  Dr.  Vocke  de- 
votes himself  to  the  discussion  of  general  principles.  It  is  a 
relief,  after  the  huge  and  many-volumed  German  works  on 
the  subject,  to  find  the  science  here  treated  as  a  whole  and  in 
so  compact  a  form.  In  other  respects,  also.  Dr.  Vocke's  work 
differs  from  most  of  its  German  predecessors.  It  contains 
almost  no  references  to  literature  and  it  is  written  in  a  style 
calculated  to  interest  the  average  layman.  But  to  those  ac- 
quainted with  the  work  just  discussed,  the  present  volume  will 
not  bring  much  that  is  new. 

Here,  as  before,  he  looks  upon  financial  history  simply  as 
the  medium  of  bringing  out  more  and  more  clearly  with  every 
generation  the  idea  of  faculty.  Here,  as  before,  he  confines  the 
term  tax  to  direct  taxation  and  eliminates  from  the  whole  field 
of  compulsory  revenue  the  so-called  Verhrauchmuflagen,  or 
indirect  taxes  on  consumption.  His  whole  classification  of 
revenues  is  very  confusing.  On  the  one  hand  he  puts  the  private 
economic  revenues,  by  which  he  understands  those  from  the 
public  domain  and  from  the  prerogatives  as  well  as  from  in- 
dustrial undertakings;  on  the  other  hand  he  puts  the  compulsory 
revenues,  divided  into  fees,  payments  for  transactions  (Verkehrs- 
ahgahen)  and  taxes.  Between  these  he  puts  another  category, 
the  so-called  "mixed"  revenues,  which  he  again  divides  oddly 
enough  into  economic  monopolies,  fiscal  monopolies  and  im- 
posts (VerbraiLchsauflagen) .  It  will  be  seen  how  unmodern 
this  is,  and  how  little  Dr.  Vocke  has  profited  by  recent  dis- 
cussion both  at  home  and  abroad. 

At  the  same  time,  in  his  treatment  of  taxation  we  find  many 
good  points,  such  as  his  examination  of  the  place  where  a  tax 
ought  to  be  paid,  involving  some  of  the  difficult  questions  of 
double  taxation.  A  valuable  feature  of  the  book  is  the  dis- 
cussion of  the  norm  of  taxation  and  the  measure  of  faculty, 
in  which  he  treats  successively  of  property,  product  and  income. 

^  Die  Grundzuge  der  FinanzwissenschafL  Von  Dr.  Wilhelm  Vocke. 
Leipzig,  1894. 


552 


ESSAYS  IN  TAXATION 


fi 


ii 


1  I 


Undue  stress  seems  to  be  laid  on  the  second  of  these,  although 
the  author  cleverly  exposes  some  of  the  exaggerations  of  his 
predecessors.  Most  of  the  book  is  of  interest  chiefly  to  Germans; 
but  as  there  are  certain  broad  traits  of  industrial  developments 
common  to  all  countries,  students  of  American  and  English 
finance  will  find  in  Dr.  Vocke's  volume  many  hints  which  can  be 
fruitfully  applied  to  conditions  at  home.  The  bibliography, 
especially  as  regards  foreign  literature,  is  weak.  The  lxx)k  can,' 
nevertheless,  be  recommended,  with  important  reservations,  to 
advanced  students. 

We  come  finally  to  the  two  volumes  by  the  distinguished 
South  German  statesman  and  scholar.  Dr.  Schaffle,  known  to 
all  students  of  fiscal  problems  since  the  appearance  in  1880 
of  his  important  work  on  Die  Grundsatze  der  Steuerpolitik.^ 
Of  his  other  contributions  to  social  and  political  science  it  is 
not  necessary  to  speak,  further  than  to  say  that  in  many  fields 
of  scientific  as  well  as  of  political  activity  he  must  be  classed 
among  the  foremost  writers  and  administrators  on  the  Euro- 
pean continent.     His  two  latest  volumes  quite  maintain  his 
great  reputation:  they  are  exact,  incisive,  clear  and  up  to  date; 
and  for  the  advanced  student  they  present  many  points  of 
view  worthy  of  consideration.    Yet,  when  the  works  are  care- 
fully analyzed,  it  will  be  found  that  most  of  the  fundamental 
ideas  are  already  contained,  although,  of  course,  in  less  system- 
atic form,  in  the  eariier  work  of  1880;  and,  to  the  average 
Anglo-Saxon  reader,  the  disadvantages  of  the  scheme  of  de- 
voting two  large  volumes  to  the  general  and  the  special  part 
of  taxation  will  be  more  apparent  than  the  advantages     The 
Germans  love  to  be  ''grwidlich''  at  all  costs,  and  to  devote 
a  great  deal  of  space  in  their  scientific  treatises  to  what  im- 
presses the  practical  man  as  savoring  a  little  of  metaphysics; 
and  this  we  see  especially  in  the  general  part  of  Dr.  Schaffle's 
work.     Another  weakness  of  the  work  is  inseparable  from 
the  method  of  treatment.    The  second  volume,  or  special  part, 
really  depends,  in  many  of  the  chief  divisions,  upon  the  dis- 
cussion of  the  more  fundamental  problems  in  the  first  part. 
As  a  consequence  we  have  a  large  amount  of  repetition.    Most 

»  Dr.  Albert  Schaffle,  Die  Steuem:  Allgemeiner  Theil    (Hand-und  Lehr- 
buch  der  Staatswissenschaften.    II.  AhtheUung:  Fi7ianzwissenschafL  2  Band  ) 
Leipzig,  189o;  Die  Steuem:  Besonderer  Theil.     Von  Dr.   \lbert  Schaffle 
(Hand-  und  Lehrhuch  der  Slaatsivissenschaften.     11.   AhtheUung:  Finanz- 
mssenschaft.  3.  Band.)     Leipzig,  1897. 


RECENT  LITERATURE  IN   TAXATION 


553 


readers  will  therefore  find  the  second  volume,  which  con- 
tains in  compressed  form  no  inconsiderable  portion  of  the  first 
volume,  at  once  more  interesting  and  more  valuable.- 

In  the  second  volume  the  most  important  discussion  is  that 
of  the  classification  of  taxes,  for  upon  this  depends  much  of 
the  distinctive  value  of  the  author's  treatment.  Dr.  Schaffle 
divides  taxes  into  direct  and  indirect;  but  he  takes  strong 
exception  to  the  commonly  accepted  theory  that  it  is  only  the 
direct  taxes  which  correspond  to  the  "faculty"  of  the  individual. 
According  to  him  the  indirect  taxes  accomplish  the  same  result, 
but  in  a  different  way.  The  direct  taxes  are  intended,  in  his 
opinion,  to  reach  the  general  or  average  taxable  capacity  of 
the  individual,  while  the  indirect  taxes  are  intended  to  reach 
the  "actual"  or  "special"  or  " individuahzed "  abifity.  He 
is  able  to  reach  this  conclusion,  however,  only  by  counting 
among  the  indirect  taxes,  in  addition  to  the  ordinary  taxes  on 
commodities  and  exchange,  what  he  calls  the  Bereicherungs- 
steuem,  including  the  taxes  on  inheritances,  on  unearned  in- 
crement and  on  lotteries,  as  well  as  some  others  not  usually 
put  into  that  category,  like  sumptuary  taxes  or  so-called  direct 
expenditure  taxes.  His  whole  discussion  of  indirect  taxation 
thus  becomes  highly  artificial,  and  by  this  arbitrary  classifica- 
tion loses  much  of  its  merit.  It  is  not  likely  that  English  or 
American  writers  will  adopt  his  classification. 

In  the  general  discussion  of  principles  Dr.  Schaffle  is  quite 
up  to  date.  He  lays  stress,  for  instance,  on  the  modern  problems 
connected  with  double  taxation  and  with  the  treatment  of 
corporations.  To  Germans  the  books  will  be  of  value  because 
of  the  special  importance  attached  to  Swiss  and  American 
experience.  For  the  average  American  reader  there  is  still  a 
great  deal  that  is  only  of  very  secondary  interest;  but  the  ad- 
vanced student  will  find  in  almost  every  chapter  of  the  two 
works  some  food  for  thought.  They  are  distinctly  able  works 
of  an  able  man. 

II.  France 

After  the  volume  of  McCulloch,  pubhshed  in  1853,  no  Eng- 
lish work  on  the  principles  of  taxation  appeared  for  forty  years. 
Enghsh  and  American  readers  were  compelled  to  depend  on 
German  and  French  treatises;  and,  from  greater  familiarity 
with  the  language,  more  commonly  on  the  latter.  But  since 
it  has  been,  until  recently,  an  unfortunate  habit  of  many  French 


554 


ESSAYS  IN  TAXATION 


11 II 


writers  on  finance  to  discuss  their  topics  in  happy  disregard  of 
the  newest  thought  in  other  countries,  it  follows  that  even  their 
most  approved  works  on  taxation  give  the  reader  only  the 
French  view,  not  the  wider  scientific  or  comparative  view.  This 
reproach  to  French  literature  has  now  been  removed  by  the 
admirable  work  of  Professor  Denis,  who  is,  however,  not  a 
l^renchman,  but  a  Belgian. 

Professor  Denis  made  his  reputation  as  an  authority  on 
finance  some  years  ago  with  the  valuable  report  to  the  city 
council  of  Brussels  on  the  income  tax,  afterwards  reprinted 
as  a  bulky  volume.  He  thereupon  gave  courses  of  lectures 
on  hnance,  which  were  subsequently  published  in  book  form 
under  the  general  title  Taxation.'  The  present  volume  gives 
the  ground  covered  in  1886-87;  a  succeeding  volume  was  to 
continue  the  subject  so  as  to  include  the  whole  field  of  taxation 
but  never  appeared.  ' 

The  fact  that  these  are  published  lectures  contributes  to  the 
value,  as  well  as  somewhat  to  the  shortcomings,  of  the  book 
-  The  style  is  simple  and  clear,  and  the  arrangement  is  logical 
and  sharply  defined;  but  on  the  other  hand  the  lecture  form 
has  made  it  impracticable  to  give  authorities  for  the  facts  and 
opinions  quoted,  except  by  a  short  bibliography  at  the  close 
of  each  chapter.     Furthermore,  the  details  of  the  argument 
have  not  been  pursued  with  such  care  as  would  be  demanded 
m  a  work  constructed  on  other  principles.    Many  of  the  finer 
points,  including  some  that  are  of  permanent  practical  impor- 
tance in  other  countries,  receive  no  attention  at  all.    The  history 
and  facts  of  taxation,  again,  are  given  only  in  a  very  fragmentary 
way.    With  all  these  qualifications,  however,  the  book  of  M. 
Denis  may  be  regarded  as  one  of  the  most  valuable  works  on  tax- 
ation hitherto  published.    Its  chief  claim  to  recognition  is  not  so 
much  the  views  of  the  author,  as  the  calm  and  unbiassed  con- 
sideration of  the  doctrines  of  all  his  predecessors.    The  funda- 
mental vice  of  many  writers  is  the  assumption  that  the  views 
expressed  by  them  are  new;  for  ignorance  of  economic  and 
financial  literature  is  scarcely  less  common  than  ignorance  of 
economic  and  financial  facts. 

Professor  Denis,  considering  the  science  of  finance  as  a  sub- 

_  *  ^^^P^':    If?ons  donn^es  aux  cours  publics  de  la  ville  de  Bruxelles. 
l-arH.  Denis,  Professeurdr University.    Premiere  S^rie.    Bruxelles    1889 
[Accompagn6    d'unj    Atlas    de    statistique    comparee.^Laxgre    folio     25 
plates.  ' 


RECENT  LITERATURE  IN  TAXATION 


555 


ordinate  division  of  sociology,  and  as  distinct  from  political 
economy  although  having  many  points  in  connection  with  it, 
attempts  to  lay  down  the  laws  of  the  relations  of  these  sciences. 
The  greater  part  of  the  book  is  devoted  to  a  discussion  of  the 
problems  of  justice,  and  to  a  consideration  of  the  various  di- 
rect taxes.  On  many  of  the  important  questions,  such  as  pro- 
gression, minimum  of  subsistence,  incidence,  the  basis  of  taxa- 
tion, etc.,  readers  who  have  been  confined  to  French  and  to 
older  English  works  will  find  a  wealth  of  new  ideas  and  a  mass 
of  interesting  facts.  Of  course  no  work  written  by  a  European, 
or  at  all  events  by  a  continental,  scholar  can  be  expected  to 
treat  primarily  of  those  questions  which  most  interest  and  affect 
Americans;  but  if  there  is  any  science  at  all  in  finance,  such 
works  as  this  must  be  deemed  of  the  greatest  importance  to 
Americans  and  Europeans  alike.  Some  minor  mistakes  might 
be  noted;  as  the  statement  that  the  idea  of  the  differentiation 
of  the  income  tax  is  to  be  ascribed  to  a  German  source.  In 
reaUty  the  theory  can  be  dated  back  to  the  beginning  of  the  cen- 
tury in  England,  and  it  has  been  fully  discussed  in  parHamentary 
reports  and  in  scientific  essays  for  many  decades.  But  such 
smaller  points  must  be  overlooked  in  a  consideration  of  the 
general  tone  and  value  of  the  book.  The  usefubiess  of  the 
work  is  greatly  increased  by  the  accompanying  volume  of 
graphic  tables. 

France  has  of  late  been  devoting  more  attention  to  practice 
than  to  theory.  Since  the  standard  work  of  Leroy-Beaulieu, 
published  in  the  middle  of  the  seventies,  there  are  down  to  the 
end  of  the  century  very  few  books  to  be  mentioned  of  wider 
scientific  interest,  if  we  except  the  brilliant  little  sketch  by  L^on 
Say  published  during  the  eighties.  But  France  also  has  had  her 
practical  difficulties  to  meet,  and  it  is  to  these  practical  ques- 
tions that  most  of  the  recent  writers  have  addressed  them- 
selves. 

In  France  the  discontent  is  of  long  standing.  Almost  every 
author  for  the  last  twenty  years  has  been  calling  attention  to 
the  lack  of  system  and  to  the  glaring  inequalities  in  the  present 
practice  of  taxation.  Ever  since  the  war  of  1870  repeated  efforts 
have  been  made  to  supplement  the  direct  taxes  and  to  rid  the 
country  of  some  of  the  burdensome  indirect  taxes  by  the  crea- 
tion of  an  income  tax;  and  the  advantages  of  such  a  policy  had 
been  hotly  discussed  by  both  sides.  In  1887  the  strife  was 
renewed  owing  to  the  proposition  of  Dr.  Koenig,  whose  memoire 


556 


ESSAYS  IN  TAXATION 


n 


'."III 


on  A  New  Income  Tax '  was  considered  so  important  that  the 
project  recommended  in  its  pages  was  adopted  by  M.  Dauphin 
then  mmister  of  finance,  and  was  introduced  as  a  government 
measure. 

Dr.  Koenig  holds  that  the  imposition  of  an  income  tax  assessed 
on  the  declared  income  of  individuals  is  practically  impossible 
m  i^  ranee.    He  finds  that  the  experience  of  England  and  Ger- 
many all  pomt  to  the  same  result— evasion  has  become  a  system, 
deceit  the  rule.    A  far  better  method  appears  to  him  to  be  to 
calculate  the  mcome  by  some  outward  sign,  such  as  the  house 
rent     The  contnbuhon  personnelle  et  mobiliere  is  already  based 
on  this  prmciple  which  Dr.  Koenig  proposes  to  develop.    It  is  a 
well-known  fact  that  the  lower  we  go  in  the  social  scale  the 
Higher  is  the  proportion  that  house  rent  bears  to  total  expenses 
or  to  mcome.  Rent  is  an  increasing  element  of  expense  in  propor- 
tion as  expenses  decrease;  the  poor  spend  relatively  far  more 
than  the  rich.    Dr.  Koenig  suggests  a  progressive  rate  of  taxa- 
tion assessed  on  the  house  rent,  maintaining  that  this  progres- 
sive rate  will  counterbalance  the  decreasing  proportion  that 
rent  bears  to  expense.    The  plan  is  skilfully  worked  out;  but,  in 
common  with  all  plans  of  taxing  expense,  it  has  one  defect. 
What  a  man  spends  is  no  sure  criterion  of  his  income,  or  of  his 
ability;  and  the  higher  you  go,  the  more  uncertain  does  the  cri- 
terion become.    The  objection  to  the  prevalent  French  system 
IS  that  the  wealthy  escape  their  share  of  taxation;  but  a  tax  on 
expense,  even  at  a  progressive  rate,  while  undoubtedly  a  step  in 
advance,  would  not  completely  remove  the  objection.     Dr. 
Koenig's  plan  has  indeed  the  merit  of  doing  away  with  all  in- 
qmsitorial  difficulties  and  of  attaching  itself  to  existing  condi- 
tions; but  It  IS  at  best  a  half-hearted  measure,  a  mere  temporiz- 
ing expedient  to  be  thrown  as  a  sop  to  the  radicals.    It  did  not 
satisfy  them,  and  the  bill  was  finally  killed  in  the  legislature 
The  work  is,  nevertheless,  interesting  and  contains  much  valu- 
able information.     The  allusions  to  America  are  not  always 
fehcitous. 

M.  Guyot,  in  his  work  on  The  Income  Tax,''  sets  himself  a 
different  task.     The  critics  of  the  French  system  of  taxation 

»  Un  nouml  Impdt  sur  le  Revenu.    M6moire  qui  a  inspire  Ic  proiet  du 
gouvemement  relatif  a  la  reforrae  de  la  contribution  personnelle  mobilidre 
Par  Dr.  Gustavo  Koenig.    Paris,  1887. 

'  ^'J^Pot  sur  le  rei^nu:  rapport  fait  an  mm  de  la  commission  du  budget. 
Par  \ves  Guyot.    Paris,  1887.  ^^ 


RECENT  LITERATURE  IN   TAXATION 


557 


have  always  contended  that  personal  property  is  unduly  ex- 
empted. M.  Guyot  was  requested  by  official  authority  to  inves- 
tigate their  propositions  for  an  income  or  for  a  general  property 
tax;  and  his  lx)ok  furnishes  a  noteworthy  addition  to  the  studies 
previously  made  by  Menier,  Denis  and  Chailley.  The  report  is 
one  of  description  rather  than  of  analysis,  and  the  various  parts 
are  of  quite  unequal  value.  The  account  of  the  English  income 
tax  is  neither  detailed  nor  satisfactory.  Attention,  however,  is 
called  to  the  familiar  fact  that  the  English  system  is  not  a  tax 
on  general  income,  but  on  product,  and  that  with  the  exception 
of  schedule  D  (income  from  commercial  pursuits,  etc.)  it  may 
well  be  compared  with  the  contribution  fondere  and  the  contribu- 
tion personnelle  et  mobiliere  of  France.  The  description  of  Ameri- 
can taxation  is  exceedingly  inadequate,  and  that  of  the  German 
system  is  not  much  better.  On  the  other  hand,  the  working 
of  the  Italian  law  of  1877  taxing  the  income  of  movable  prop- 
erty is  fully  explained;  and  a  good  chapter  is  devoted  to  the 
income  and  property  taxes  of  the  Swiss  cantons. 

M.  Guyot  is  not  a  partisan  of  the  income  tax;  he  advances 
the  common  argument  of  the  inquisitorial  character  of  the  tax, 
and  discusses  rather  superficially  the  question  of  progression. 
The  history  of  the  various  projects  from  1848  onward  is,  how- 
ever, well  written  and  interesting.  He  thinlcs  that  France 
committed  a  grave  mistake  after  the  Prussian  war  in  increasing 
the  indirect  taxes.  He  leans  toward  a  general  property  tax, 
like  that  advocated  by  Menier;  and  in  discussing  the  objection 
that  the  valuation  is  attended  with  great  difficulties,  he  says: 
''  La  pratique  des  Etats-Unis  et  de  la  Suisse  repond  encore  d  cette 
objection."  It  is  to  be  feared  that  this  rosy  view  is  caused  by 
Ignorance  of  American  methods  and  results.  His  error  shows 
the  extreme  danger  of  general  analogies,  and  tends  to  make 
one  sceptical  as  to  M.  Guyot's  other  propositions. 

The  practical  outcome  of  the  report  is  a  proposal  to  reform  the 
property  taxes.  The  land  tax,  as  imposed  in  1790,  is  an  ap- 
portioned tax.  As  a  consequence,  as  early  as  1821  the  division 
between  the  departments  and  the  communes  was  so  unequal 
that  in  some  cases  the  tax  amounted  to  one-sixth,  in  others  to 
only  one-seventeenth,  of  the  rent  or  produce.  A  general  valua- 
tion or  cadastre  was  begun  in  1808  but  was  not  finished  until 
1851;  and  in  the  meantime  the  valuation  has  again  greatly 
changed  so  that  at  present  the  amount  of  tax  paid  varies  from 
one  to  twenty  per  cent  of  the  rent.    As  an  escape  from  this  cry- 


lljlf 


558 


ESSAYS  IN   TAXATION 


n 


,111 


I 


;i 


mg  inequality  Guyot  demands  its  conversion  into  a  percentage 
tax,  m  order  that  each  plot  may  bear  its  proportionate  burden, 
lie  would,  moreover,  have  the  tax  levied  on  capital  value,  rather 
than  on  rent  or  annual  value.    A  similar  reform  is  suggested  for 
the  tax  on  personal  property  {la  contnhution  personelle  et  mobi^ 
i^re    which  since  1832  has  been  apportioned.    These  changes, 
together  with  an  abolition  of  the  duties  on  the  transfer  of  land 
amounting  at  present  to  ten  per  cent  of  the  value,  would  in  his 
opimon  result  m  a  far  more  equable  and  remunerative  fiscal 
system,  and  would  serve  as  an  introduction  to  still  greater  and 
more  important  reforms.    The  student  of  comparative  taxation 
will  hnd  in  the  volume  many  useful  hints. 

In  a  widely  read  work  on  Financial  Reform  ^  another  remedy 
IS  proposed.    The  title  is  somewhat  misleading,  as  M.  Raynaud 
IS  the  member  of  the  society  for  financial  reform  who  offered 
the  prize,  while  M.  Lorrain  is  the  author  of  the  essay  which 
took  the  prize.    lAI.  Lorrain's  plan,  based  on  taxation  of  expense, 
IS  very  simple.     He  would  have  the  government  abolish  all 
existing  taxes  except  the  import  and  succession  duties.    In  their 
stead  the  government  would  defray  all  its  expenses  through  the 
issue  of  circulating  notes  payable  in  three  years.    These  notes 
{bom  du  tresor)  while  outstanding,  would  be  subjected  to  a  tax 
of  ten  centimes  per  day  for  every  hundred  francs,  the  tax  being 
paid  by  the  holder,  who  affixes  stamps  for  the  requisite  amount 
to  the  notes.    The  idea  is  that  the  notes  are  to  form  the  sole 
circulating  medium  (with  the  exception  noted  below) ;  and  that 
since  every  one  must  use  them,  every  one  ^vill  pay  a  tax  in  pro- 
portion to  his  expense.    To  provide  for  the  exigencies  of  trade, 
all  checks,  drafts,  bills  of  exchange,  etc.,  are  subjected  to  a 
like  tax.     No  note  is  to  be  issued  under  one  hundred  francs 
so  that  the  poor,  who  will  continue  to  use  small  silver  change' 
will  be  practically  exempt.    The  sale  of  the  stamps  will  defray 
all  public  expenses. 

Were  it  not  that  this  fantastic  idea  received  the  prize  of  two 
thousand  francs,  and  that  the  society  for  financial  reform  circu- 
lated It  extensively,  it  would  not  deserve  notice  here.  Its  absurd- 
ity IS  apparent.  As  a  currency  scheme  it  approaches  danger- 
ously near  to  the  fiat-money  craze;  for  the  government  will  have 
no  check  on  its  extravagance,  and  the  notes,  like  the  assignats 

bysteme  de  M.  Jacques  Lorrain,  premier  Iaur(5at,  etc.    Par  A.  Raynaud 
avec  une  preface  d'Augustin  Gallopin.    Paris,  1888 


RECENT  LITERATURE  IN  TAXATION 


559 


of  old,  must  inevitably  depreciate.  As  a  tax  scheme  it  is  fla- 
grantly inequitable,  for  the  tax  will  be  paid,  not  by  the  consumer, 
as  is  claimed,  but  by  the  debtor,  whether  he  be  producer  or 
consumer.  Even  if  paid  by  the  consumer,  it  would  be,  like  most 
taxes  on  consumption,  regressive,  or  as  the  French  say,  progres- 
sif  d  reborns.  Finally,  it  would  fall  harder  on  the  working  classes 
than  on  all  others,  because  it  would  bring  about  compulsory  pur- 
chases of  commodities  in  order  to  get  rid  of  the  notes  as  soon  as 
possible.  To  call  such  a  tax  Vimpdt  sur  les  revenus  is  a  crass  mis- 
nomer. 

It  would,  however,  lead  us  too  far  afield  to  pursue  the  study 
of  practical  tax  reform  in  France.  What  primarily  interests 
us  here  is  the  general  scientific  work  in  taxation;  and  with  two 
exceptions  the  last  decade  of  the  century  has  little  to  show.  The 
book  of  Professor  Worms,  on  The  Science  of  Finance,^  is  a 
smoothly  written  discussion  of  some  general  questions.  The 
author  displays  familiarity  with  the  older  German  Uterature; 
but,  as  he  himself  states,  desires  to  give  only  an  elementary  ac- 
count of  some  of  the  fundamental  problems.  He  is  on  the  whole 
very  fair;  but  the  book  is  not  clear-cut,  and  is  not  apt  to  exert  a 
considerable  influence  outside  of  France. 

A  distinctly  abler  work  is  that  of  M.  Stourm  who  has  long 
been  favorably  known  as  the  author  of  an  excellent  book  on  the 
Budget,  as  well  as  of  the  classic  study  on  the  Finances  of  the  old 
Regime  and  the  Revolution.  It  was  natural,  therefore,  to  expect 
that  his  new  book  on  General  Systems  of  Taxation  ^  would  be  an 
important  contribution  to  science.  As  a  matter  of  fact,  the 
work  proves  to  be  in  some  respects  disappointing. 

As  in  all  the  writings  of  M.  Stourm,  the  reader  will  indeed 
find  a  simplicity  and  clearness  that  leave  nothing  to  be  desired. 
But  some  readers  will  question  whether  the  simplicity  is  not 
in  this  case,  at  least,  to  some  extent  purchased  at  the  cost  of 
thoroughness.  To  the  student  who  knows  anything  of  the  com- 
plexities of  many  of  the  problems,  the  sang-froid  with  which 
whole  classes  of  arguments  are  either  absolutely  ignored  or  coolly 
brushed  aside  is  surprising.  M.  Stourm  is  a  conservative;  but 
that  he  should  treat  the  arguments  of  his  opponents  so  cavalierly 

^  Doctrine,  histoire,  pratique  et  rSforme  financikre  ou  expose  Hemen- 
taire  et  critique  de  la  science  des  finances.  Par  Emile  Worms,  Professeur 
^  la  Faculty  de  Rennes.    Paris,  1891. 

2  Systemes  gen6raux  dHmpots.  Par  R6n6  Stourm,  ancien  inspecteur  des 
finances.    Paris,  1893. 


.,J 


560 


ESSAYS  IN   TAXATION 


iiii 


Ml  " 


iHf 


IS  disheartening.    The  book  has  many  admirable  points;  it  brings 
clearly  before  us  the  real  problems  of  French  taxation,  it  abounds 
m  fehcitous  illustrations,  and  it  has  some  excellent  criticism  of 
certain  French  projects.    Its  chief  defect  is  its  insularity.    Al- 
though  It  abounds  in  references  to  French  works,  only  a  single 
foreign  author  on  finance  is  mentioned  later  than  John  Stuart 
Mill,  and  that  one,  an  American,  in  a  wrong  connection  and 
with  a  mutilated  title.    Not  a  word  is  said  about  the  contribu- 
tions to  theory  made  by  the  Germans,  the  Italians,  the  Dutch 
and  others  during  the  past  ten  or  twenty  years.    Even  as  to  the 
practical  discussions,  we  find  with  a  few  exceptions  little  that 
has  not  already  been  said,  although  perhaps  not  ^vith  the  same 
grace  and  skill,  m  other  works.    It  may  be  alleged  in  extenuation 
that  the  book  was  meant  to  explain  the  French  system  of  taxa- 
tion; but  there  is  nothing  in  the  title  to  suggest  this,  and  even 
in  a  discussion  of  the  French  system  more  regard  should  have 
been  paid  to  general  theory.    The  book  also  contains  some  errors 
ot  tact.    The  system  of  direct  taxation  in  America  is  mentioned 
as  a  warning  example  of  the  "mixed  system,"  or  combination 
of  the  mcome  tax  with  the  property  tax;  while  the  general  prop- 
erty tax,  or  ''impdt  sur  le  capitaV'  is  said  never  to  have  existed 
alone  ^nywh^re.     The  work  is  in  a  measure  redeemed  by  a 
vivacity  of  treatment  and  a  charm  of  style,  unusual  even  among 
Frenchmen.    Were  it  as  erudite  and  profound  as  it  is  attrac- 
tive,  It  would  rank  with  the  most  remarkable  books  of  the 
decade. 

The  latest  work  ^  of  the  indefatigable  French  publicist,  Four- 
nier  de  Flaix,  although  in  two  volumes,  is  only  the  first  instal- 
ment of  what  promised  to  be  a  stupendous  investigation,  if  it  was 
ever  completed.  As  a  matter  of  fact  the  work  remained  a  torso, 
lo  write  the  history  of  taxation  throughout  the  world  is  not  an 
easy  task  To  do  it  adequately,  one  would  need  to  be  not  only  a 
polyglot,  but  also  an  archaeologist  of  no  mean  distinction  To 
depend  upon  secondary  materials,  as  does  our  author,  is  not 
always  completely  satisfactory. 

M.  de  Flaix's  work  is  divided  into  four  parts.  The  first  treats 
of  the  ancient  Onental  civilizations,  from  Chaldea  and  Babylon 
to  Egypt  and  China;  the  second,  of  Greece;  the  third,  of  Rome- 
and  the  fourth,  of  the  feudal  epoch  in  France  and  the  other 
European   states.      These   four   parts   occupy   very   unequal 

^Llmp&t  dans  les  diverses  civilisatims.    Par.  E.  Fouraier  de  Flaix.    Pr«- 
mihreSene.    Paris,  1897.-2  vols.  "iier  ae  J^iaix.    /^re- 


RECENT  LITERATURE  IN   TAXATION  561 

spaces:  two  hundred  and  fifty  pages  are  devoted  to  the  Orient 
and  antiquity,  and  the  remaining  five  hundred  and  fifty  pages 
to  the  middle  ages.  Even  thus,  however,  there  is  a  great  deal 
of  padding.  When  the  author,  for  instance,  speaks  of  the  Slavs 
he  devotes  over  twenty  pages  to  their  origin  and  historical  devel- 
opment and  to  an  account  of  some  of  their  economic  institutions 
All  of  this  may  be  very  interesting,  but  has  little  or  nothing  to 
do  with  taxation.  What  is  noted  of  the  Slavs  is  more  or  less  true 
of  the  other  peoples.  It  must  also  be  observed  that  most  of  the 
space  IS  devoted  to  that  period  of  taxation  with  which  we  are 
the  most  familiar— that  is,  mediaeval  taxation,  English  and 
Continental.  This  field  has  been  well  worked,  and  it  seems 
unnecessary  to  go  over  it  again  so  much  in  detail.  Nevertheless, 
some  of  his  apercus  are  very  striking,  as  when  he  sums  up  the 
change  from  Roman  to  mediaeval  traditions,  in  the  sentence: 
''L'lmpot  devint  un  droit  de  propriety  pour  les  uns  et  une 
servitude  pour  les  autres." 

The  chief  criticism  to  be  urged  is  that  the  author,  while 
saying  a  great  deal  about  economic  and  political  conditions, 
generally  fails  to  grasp  the  real  connection  between  economics 
and  finance  or  to  call  attention  to  those  particular  economic 
institutions  which  conditioned  the  fiscal  development.  Such 
statements  as  that  the  Arab  is  on  the  whole  refractory  to  the 
notion  of  'Haxes  consented  to  and  voluntarily  paid"  (p.  494) 
shows  that  M.  de  Flaix  sometimes  describes  as  national  char- 
acteristics what  are  nothing  more  nor  less  than  the  inevitable 
accompaniments  of  certain  stages  of  economic  progress. 

The  two  volumes  of  M.  de  Flaix  cover  a  great  deal  of  inter- 
esting and  valuable  ground;  but,  with  comparatively  few  ex- 
ceptions, they  contain  little  that  is  not  to  be  found  elsewhere; 
and  much  of  the  information  that  they  do  contain  is  not  put 
into  its  proper  perspective.  For  those,  however,  who  wish  to 
have  a  convenient  epitome  of  the  earlier  fiscal  systems  and  a 
good  general  account  of  feudal  finance  the  book  may  be  com- 
mended. 

III.  Italy,  Holland  and  Spain 
In  some  respects  the  best  work  on  certain  lines  of  public 
finance  toward  the  end  of  the  nineteenth  century  was  done  by 
the  two  nations  with  whose  literature  we  are  less  familiar,— the 
Italians  and  the  Dutch.  It  is  worth  while  to  call  attention  to  a 
few  of  their  late  books  on  general  theory. 


!l 


562 


ESSAYS  IN  TAXATION 


\ii 


The  Italians  have  always  been  remarkable  for  the  avidity 
with  which  they  have  seized  upon  and  attempted  to  assimilate 
foreign  theories;  and  so  it  is  with  the  application  of  the  more 
recent  doctrmes  of  value  to  fiscal  problems.    Professor  Ricca- 
balerno  s  Science  of  Finance '  is  only  a  compendium,  but  it  is 
noteworthy  for  its  clear  and  succinct  discussion  of  fundamental 
problems.    It  deals  very  little  with  facts,  and  never  with  details 
but  attempts  to  lay  down  guiding  principles.     It  is  in  many 
respects  more  difficult  to  write  a  small  work  than  a  large  one 
and  Ricca-Salemo  might  easily,  had  he  so  chosen,  have  expanded 
his  volume;  for  his  previous  elaborate  works  on  the  Histar2j  of 
Fiscal  Doctrines  in  Italy  and  the  Theory  of  Public  Debts  show 
that  he  is  fully  acquainted  with  all  the  literature  of  the  subject 
In  this  little  work  he  discusses  first  what  he  considers  to  be  the 
three  principal  doctrines  of  public  finance,— the  theories  of 
consumption,  exchange  and  production.    Many  of  his  observa- 
tions are  acute,  but  his  criticisms  as  well  as  his  conclusions  are 
based  chiefly  on  those  of  Sax.    He  treats  of  the  doctrines  of 
benefit  and  of  faculty  in  matters  of  public  revenue;  but  like 
most  of  the  continental  writers  he  distinguishes  only  between 
fees  and  taxes.     Ricca-Salerno's  attempt  always  to  find  the 
golden  mean  sometimes  brings  him  into  difficulties,  as  in  the 
case  of  progressive  taxation,  which  he  says  is  not  at  all  a  matter 
of  theory,  but  of  practice.    The  doctrine  of  incidence  is  passed 
over  a  little  too  summarily,  but  the  results  of  recent  studies 
are  shown  m  the  application  of  the  marginal  utility  theory  to 
fiscal  problems.    On  the  whole  the  work  is  important,  not  only 
because  of  these  newer  views,  but  also  on  account  of  the  emi- 
nently lucid  presentation,  in  small  compass,  of  the  ba^ic  doc- 
trines. 

Not  only  Ricca-Salerno  but  other  writers,  young  and  old 
have  started  out  in  their  discussion  from  a  consideration  of 
the  more  recent  theories  of  value.  Professor  Viti  de  Marco 
in  his  Theoretical  Character  of  Financial  Economy,^  endeavor*^ 
to  point  out  the  resemblances  and  the  differences  between 
finance  and  economics,  criticising  the  prevalent  distinction 
between  science  and  art,  and  pointing  out  the  real  nature  of 
natural  law  in  finance.    In  a  more  acute  work  on  The  Scientific 

^^Scienza    delle    Finame,      Di    Giuseppe    Ricca-Salemo.      Florence, 

2//  Carattere  Teoretico  deW  Economia  Finanziana.     Di  A   de  Viti  dt^ 
Marco.    Rama,  1888.  ^® 


RECENT  LITERATURE  IN  TAXATION  563 

Data  of  Public  Firmnce  '  Mazzola  attempts  to  state  the  general 
characteristics  of  finance  as  a  social  phenomenon.  He  not  only 
deals  with  questions  of  method,  but  devotes  himself  especially 
to  the  economic  basis  of  taxation,  taking  issue  in  several  points 
with  Sax  His  work,  full  of  dialectic  and  of  keen  reasoning,  is 
on  y  for  the  most  advanced  student.  It  is,  however,  question- 
able whether  any  attempt  to  explain  taxation  solely  as  a  form  of 
value  can  ever  succeed. 

Professor  Zorh  goes  a  step  further.    Starting  out  with  two 
works  on  Fiscal  Systems  '  and  on  the  Italian  Law  of  Taxation  ' 
he  soon  found  it  necessary  to  get  a  theoretical  basis  for  his  con- 
clusions.   This  he  sought  in  his  Science  of  Taxation.'    He  tells 
us  that  neither  the  ^'concrete-abstract''  method  nor  the  his- 
torical method  alone  can  solve  the  problems.     For  the  science 
ot  taxation  he  claims  a  complete  autonomy  a^  the  most  impor- 
tant  part  of  finance,  but  would  include  thereunder  also  the  sub- 
ject of  fees    His  classification  of  pubfic  revenues,  incidentally  re- 
marked,  displays  some  acute  criticism  of  his  German  and 
Austrian  predecessors,  but  is  not  wholly  satisfactory.    In  the 
chapter  on  the  causes  of  taxation,  Zorh  discusses  at  some  length 
the  views  of  Sax,  and  while  conceding  that  subjective  value 
and  final  utihty  play  a  considerable  role  in  the  interpretation 
of  actual  tax  systems,  he  points  out  that  they  do  not  form  the 
sole  or  even  the  most  important  explanation.    The  final  chapter 
on  the  effects  of  taxation  is  based  largely  on  the  work  of  Cournot 
In  a  still  later  book,  entitled  the  Psychological  Theory  of  Public 
Finance,'  he  develops  his  own  ideas  a  little  more  fully.     His 
contention  is  that  just  as  value  and  utility  depend  upon  certain 
psychological  processes,  so  taxation  which  deals  with  pubUc 
value  must  be  studied  from  the  same  point  of  view.     In  his 
chapter  on  the  psychological  basis,  he  discusses  the  Austrian 
school;  m  the  succeeding  chapter  on  the  relations  of  political 
and  economic  sentiment  to  public  finance,   he  develops  the 
suggestive  idea  of  Loria.     But  his  whole  treatment  remains 
so  to  say,  up  m  the  clouds,  and  it  is  often  difficult  to  see  the 
application  to  practical  problems.     Finally,  Professor  Conig- 

\{^f^frimi  delta  FinanzaPuhhlica.    Di  Ugo  Mazzola.    Roma  1890 
'Sisteyni  Finanzmri.    Di  Alberto  Zorli.    Bologna,  1885  """^^^  ^'=>^' 

a  mntto  Tributario  Italiano.    Di  Alberto  Zorli.    Bologna.  1887 

Albertotr  SogSa"''"'^  ""^  ^^^^^^^'  ^"^^  ^^---^-    ^ 
^^^eona  Psicologica  delta  Finanza  Pvbhlica,    Di  Alberto  ZorU.    Bologna, 


564 


ESSAYS  IN  TAXATION 


J 


i; 


I 


Iiani,  m  his  General  Theory  of  the  Effects  of  Taxation,^  gives 
a  very  abstract  discussion  of  taxation  regarded  simply  as  an 
addition  to  the  cost  of  production.  He  deals  with  the  most 
furidamental  problems;  but  the  effort  is  a  little  too  much  for  him 
and  the  treatment  of  so  far-reaching  a  set  of  questions  is  far 
from  satisfactory.  All  these  Italian  works,  however,  show  the 
undoubted  impulse  given  by  the  modern  doctrines  of  value 
and  utility  to  the  investigation  of  fiscal  theory. 

Somewhat  similar  is  the  impression  made  by  the  recent 
Dutch  works.    The  writers  of  Holland  are  not  so  well  known  as 
they  deserve  to  be.    The  contest  between  the  schools,  that  has 
agitated  Germany  and  Italy  and  has  spread  to  England  and 
America,  has  never  affected  Holland.    The  Dutch  writers  have 
pursued  m  harmony  the  even  tenor  of  their  way,  accepting  what 
was  best  in  both  schools,  and  developing  on  independent  lines. 
Ihis  harmony  is  in  great  part  due  to  the  leader  of  the  Dutch 
economists,  N.  G.  Pierson,  who  from  the  very  outset    ac- 
cepted Jevons'  theories.      In  fact,  the  marginal-utility  theory 
of  value  had  been  accepted  and  developed  in  many  of  its 
applications  in  Holland  years  before  the  so-called  Austrian 
school  made  itself  talked  of.     On  the  other  hand,  Holland 
nas  not  been  lacking  in  those  who  have  devoted  themselves 
especially  to  the  historical  and  statistical  side  of  economics 
without  thinking,  however,  that  they  possessed  all  the  truth! 
1  he  science  of  finance  was  treated  at  a  somewhat  later  stage 
of  Dutch  development,  but  with  equal  success. 

One  of  the  most  recent  treatises  is  Cort  van  der  Linden's 
Text-hook  of  Finance,'^  which  deals  in  this  volume  only  with 
taxation.  After  a  general  discussion  of  the  nature  and  impor- 
tance of  public  revenues,  the  author  treats  of  the  three  divisions 
of  taxation,  as  based  respectively  on  the  legal,  the  economic 
and  the  fiscal  principles.  The  legal  principles  are  those  of  equal- 
ity of  what  he  calls  social  policy,  and  of  universality  The 
economic  principles  deal  with  the  pressure  and  the  shifting  of 
taxation.  The  fiscal  principles  are  those  of  adequacy,  fixity, 
elasticity  and  innocuity  or  the  least  possible  detriment  to  pro- 
duction and  exchange.    This  division  is  perhaps  not  unexcep- 

»  Teona  Generale  degli  Effetti  Ecmtomid  delle  Imposte.    Sagdo  di  Eco- 
nomia  Pura.    Del  Dottor  Carlo  A.  Conigliani.    Milano,  1890 
^  2  Leerboek  der  Financien.    De  Theorie  tier  Belastingen.    Door  P  W  A 
=^rt  van  der  Linden     Hoogleeraar  aan  de  Faculteit  der  Rechtsgeleerdheid 
de  Gronmgen.    The  Hague,  1887. 


RECENT  LITERATURE  IN  TAXATION  565 

tionable.    An  important  part  of  the  work  is  devoted  to  the  ad- 
mmistrative  side  of  the  public  finance,  such  as  the  methods  of 
payment  of  control,  of  remedies  and  of  penalties.    This  includes 
both  an  historical  and  a  comparative  discussion,  and  attempts  to 
draw  some  general  conclusions.    The  author  divides  taxes  into 
those  on  product  (ontvangstbelastingen) ,  on  expense,  on  exchange 
and  on  income;  and  he  compares  the  systems  in  England  Ger- 
many France  and  Holland.    While  not  making  any  noteworthy 
contribution  to  theory,  van  der  Linden's  work  is  welcome  as 
extending  our  material  for  a  comparative  science  of  finance 
A  more  important  treatise  is  Pierson's  Handbook  of  Politi- 
cal  Economy^  of  which  the  first  part  was  published  in  1884 
Over  half  of  the  present  volume  is  concerned  with  public  fi- 
nance; although  many  of  the  problems  had  several  years  ago 
been  dealt  with  by  him  in  his  Grondheginselen  der  Staathuis- 
houdkunde      Pierson's   treatment   is   characterized   by   broad 
touches.    He  is  thoroughly  at  home  in  all  the  recent  continental, 
English  and  even  American  literature,  and  tries  to  get  to  the 
bottom  of  many  difficult  problems.    He  is  one  of  the  first  to 
attempt  a  comprehensive  theory  of  incidence  combining  Schaf- 
fle  s  amortization  theory  with  some  more  eclectic  views     He 
sharply  criticises  Mill's  treatment  of  the  principle  of  equality  of 
sacrifice,  ^nd  constructs  his  whole  theory  on  the  principle  of 
taculty.    Everywhere  the  subject  is  treated  with  a  master-hand 
it  IS  a  work  not  so  much  for  the  beginner,  as  for  the  advanced 
student  who  desires  to  analyze  more  carefully  the  leading  the- 

T'u'l  T'^^'''  P""^^^^  ^°^^^^-  ^"^o^g  the  discussions  to 
which  he  devotes  special  attention  is  that  of  progressive  taxa. 
tion,  in  the  course  of  which  he  criticises  the  views  of  the  other 
Dutch  writers,  which  have  been  treated  in  detail  elsewhere  ^ 
and  whose  influence  is  seen  in  the  recent  reforms  of  Dutch  taxa- 
tion described  in  another  chapter  of  the  present  work  ^ 

To  mention  only  the  Italian  and  the  Dutch  works  would 
by  no  means  exhaust  the  literature  of  value  to  the  economist 
among  the  less  well-known  continental  nations.  Even  in 
the  Iberian  peninsula  there  were  signs  of  renewed  scientific 
activity  toward  the  end  of  the  century. 

ul^rh^t^^^^^^^^  Door  N.  G.  Pierson.    Tweede  Deel. 

1912  ^  ^^""^  appeared  in  an  EngUsh  translation  in 

*  Cf.  Seligman,  Progressive  Taxation. 
'  Sujtra,  pp.  466  et  seq. 


f 


i'  li 


i 

1 


566 


ESSAYS  IN   TAXATION 


The  Portuguese  work  of  Pereira  Jardim  on  the  Science  of 
Finance  ^  interests  us  more  from  the  standpoint  of  fiscal  practice 
than  of  fiscal  theory.  Not  that  theoretic  discussions  are  absent 
from  his  book  or  without  ability;  but  as  the  work  is  posthumous, 
based  on  lectures  delivered  several  years  ago,  the  field  of  dis- 
cussion does  not  include  the  newer  theories  of  the  last  decade 
or  two.  Leroy-Beaulieu  and  Parieu  among  the  French,  Rau 
and  Jakob  among  the  Germans  are  the  latest  foreign  authors 
discussed.  Pereira  Jardim  does  not  really  add  anything  to 
theory;  nor  are  his  discussions  in  any  way  novel;  but  the  his- 
tory and  description  of  Portuguese  public  finance,  and  the 
contmual  references  to  the  inter-relations  between  Portuguese 
law  and  economics  will  be  welcome  to  the  student  of  compara- 
tive finance. 

On  the  other  hand,  the  two-volume  work  of  Professor  Piernas- 
Hurtado  of  Madrid,  entitled  Treatise  on  the  Public  Economy,^ 
is  interesting  in  many  ways.  Like  the  Italians  and  the  Dutch, 
the  Spanish  writers  have  profited  by  recent  foreign  investiga- 
tion, and  treat  many  of  the  problems  from  the  newer  point^of 
view.  Piemas-Hurtado,  while  quoting  liberally  from  Wagner 
and  the  other  Germans,  does  not  fear  to  take  issue  with  them 
occasionally  and  preserves  his  own  individuality.  This  we 
notice  not  alone  in  questions  of  theory,  but  m  problems  of 
practical  politics. 

The  introductory  chapter,  on  the  history  of  the  science, 
is  valuable  as  calling  attention  to  numerous  Spanish  writers,' 
not  alone  of  the  seventeenth  century  when  Spanish  literature 
was  still  almost  at  the  flood,  but  also  of  more  recent  times.  The 
author  points  out  the  causes  of  the  essentially  individualistic 
trend  of  the  nineteenth-century  Spaniards,  and  the  socialistic 
reaction  of  more  recent  years.  The  general  features  of  the 
development  are  the  same  in  Spain  as  in  almost  all  the  other 
European  countries.  Like  some  of  his  German  models,  Piernas- 
Hurtado  devotes  a  number  of  chapters  to  the  conception  of 
the  state,  to  economic  life  in  general,  and  to  the  economics  of 
the  state  in  particular.  He  looks  on  public  expenses  as  public 
consumption,  but  gives  us  here  almost  nothing  but  platitudes. 

»  Principios  de  Finan^as,  gusendo  as  PrelecgOcs  feitas  pelo  lente  da  Facul- 
dade  de  Direito.     Antonio  dos  Sanctos  Pereira  Jardim.    Quarta  edicao 
Coimbra,  1891. 

2  Tratado  de  Hacienda  Pvblica  y  Examen  de  la  Espanola.    Por  Jos^  M 
Piemas-Hurtado.    Cuarta  edici6n.    Madrid,  1891. 


RECENT  LITERATURE  IN  TAXATION  567 

When  we  come  to  public  revenues,  however,  it  is  different 
He  classifies  these  according  as  they  arise  from  gifts,  fiscal 
domains,  public  works,  fiscal  monopolies,  taxes,  eminent  domain 
fines  or  escheats;  and  devotes  several  chapters  to  each  of  the 
important  classes.     The  most  noteworthy  point  in  his  treat- 
ment of  taxes  is  his  view  as  to  the  basis  of  taxation.    He  dis- 
cusses in  turn  expense,  income  and  property,  a.s  bases,  and 
finds  each  of  them  essentially  defective.    The  really  equitable 
basis  of  taxation  he  finds  to  be  faculty,  or  the  economic  position 
of  the  mdividual  as  shown  by  his  ^'liquid  assets"  (el  impuesto 
sobre  los  haberes  liquidos).    By  this  term  he  wishes  to  denote 
the  means  of  the  individual  as  conditioned  by  his  needs,  or  the 
proportion  between  income  and  property  on  the  one  hand,  and 
the  claims  made  upon  him  by  expenses  on  the  other.    Piemas- 
Hurtado  thus  simply  attempts  to  put  into  plain  language  the 
marginal-utility  theory  of  taxation,  as  developed  by  recent 
Dutch  and  Austrian  writers.    He  confesses  that  this  alone  will 
not  remedy  social  evils,  that  it  is  not  susceptible  of  an  exact 
mathematical  computation,  and  that  it  may  give  rise  to  arbi- 
trariness; but  he  maintains  that  the  other  suggested  bases  of 
taxation  disclose  the  same  or  greater  defects.    Regard  for  the 
mdividual  position  of  the  contributor  is  in  his  opinion  the 
really  important  consideration.     The  vagueness  of  this  test 
as  a  practical  program  of  taxation  will  at  once  strike  the  reader; 
but  Piernas-Hurtado  is  content  to  leave  the  discussion  in  the 
field  of  theory. 

In  treating  of  the  various  classes  of  taxation,  he  later  makes 
many  good  and  practical  suggestions.  The  whole  of  his  second 
volume  IS  in  fact  devoted  to  the  history  and  criticism  of  the 
state,  local  and  colonial  public  finance  of  Spain;  and  he  clears 
up  much  that  Parieu  and  other  writers  have  failed  to  explain. 
Like  so  many  of  the  continental  tax  reformers,  he  sees  the 
greatest  promise  of  improvement  in  the  substitution  of  direct 
for  indirect  taxes,  and  he  devotes  a  considerable  portion  of  his 
work  to  the  proposed  adjustment  of  the  Spanish  public  revenues 
to  the  principles  of  uniformity  and  universality.  Several 
chapters  on  the  theories  and  practice  of  public  credit,  and 
especially  on  the  budget  and  financial  administration,  conclude 
a  work  whose  open-mindedness,  clearness  and  wide  range  of 
view  entitle  it  to  an  honorable  place  in  the  list  of  text-books 
of  finance.  That  this  is  sorely  needed  is  open  to  very  little 
doubt  on  the  part  of  the  attentive  reader. 


Vi 


•I 


568 


ESSAYS  IN  TAXATION 


IV.  Switzerland 

Switzerland  is  the  only  European  country  where  the  general 
property  tax  still  plays^  an  important  role.  It  is  the  one  state 
whose  methods  of  taxation  bear  a  close  resemblance  to  those 
of  the  United  States.  It  would,  therefore,  be  reasonable  to 
expect  that  a  work  of  such  prodigious  proportions  as  that  of 
Professor  Schanz  on  Taxation  in  Switzerland  in  its  Development 
since  the  Beginning  of  the  Nineteenth  Century  ^  should  be  of  the 
utmost  importance  to  all  Americans;  and  this  expectation  is 
realized.  Rarely  in  the  history  of  economic  literature  has  a 
foreign  work  been  published  which  is  at  all  comparable  to  this 
in  its  value  to  the  American  student  of  finance. 

Professor  Schanz  earned  his  reputation  by  the  thorough 
work  displayed  in  his  Englische  Handelspolitik  gegen  Ende  des 
Mittelaltersy  published  some  thirty  years  ago,  as  well  as  by 
several  minor  works  on  the  history  of  labor.  In  1884  he  started 
the  FinanZ'Archiv,  which  is  still  the  only  serious  review  devoted 
exclusively  to  the  science  of  finance.  In  this  periodical  he 
has  been  publishing  for  the  past  few  years  detailed  histories 
and  descriptions  of  the  tax  systems  of  different  German  common- 
wealths, which  have  challenged  admiration  for  their  solidity 
and  accuracy.  Now  he  offers  to  the  scientific  world  a  work 
which  stands  unequalled  in  magnitude  of  scope  and  detail  of 
treatment. 

A  word  first  as  to  the  methods  of  the  author.  The  opening 
volume  is  devoted  to  a  sketch  of  the  general  development  of 
Swiss  taxation.  A  preliminary  chapter  treats  of  the  federal 
taxes  and  of  the  general  situation;  a  second  chapter,  of  the 
general  direct  taxes  in  the  cantons;  a  third  chapter,  of  the 
licenses,  succession  duties,  military  tax,  etc.;  a  fourth  chapter, 
of  the  indirect  taxes  on  consumption;  while  a  final  part  is  de- 
voted to  the  questions  of  local  taxation.  The  three  following 
volumes  take  up  each  of  the  twenty-five  separate  cantons  in 
detail;  describe  the  history,  not  only  of  all  the  changes,  but 
of  all  the  attempted  reforms;  and  close  with  a  minute  statement 
of  the  existing  condition  in  each.  The  fifth  and  final  volume 
contains  the  text  of  all  the  important  tax  laws  and  administra- 
tive ordinances  for  each  canton  since  the  beginning  of  the 

*  Die  Steiiern  der  Schweiz  in  ikrer  Entwickelung  seit  Beginn  des  19  Jahr^ 
hunderts.    Von  Georg  Schanz.    Stuttgart,  1890.— 5  vols. 


RECENT  LITERATURE  IN  TAXATION  569 

century.    It  will  be  seen  at  a  glance  how  stupendous  must  have 
been  the  labor  necessary  to  complete  such  a  task. 

Let  us  now  endeavor  to  ascertain  in  what  respects  the  work  is 
important  to  Americans.    Professor  Schanz  begins  by  accepting 
the  theory  advanced  by  the  present  writer  regarding  the  histor- 
ical development  of  taxation  and  the  position  of  the  general 
property  tax  in  this  development.    He  shows  that  Switzerland, 
like  the  United  States,  has  retained  the  mediaeval  property 
tax  up  to  this  day;  but  he  further  shows  that  Switzerland, 
unlike  the  United  States,  has  successfully  endeavored  to  re- 
construct its  property  tax  and  to  supplement  it  by  another 
system  which  has  brought  it  more  into  harmony  with^he  needs 
of  the  present  century.     The  conception  of  general  property 
as  the  basis  of  taxation  has  been  permeated,  gradually  but 
with  ever-increasing  rapidity  during  the  past  thirty  years, 
with  the  ideas  of  product  and  of  income.     The  attempt  to 
realize  the  principle  of  ability  to  pay  has  resulted  in  dissatis- 
faction with  the  old  property  tax  and  a  remodelling  of  the 
whole  system.     The  methods  in  the  various  cantons  may  be 
summed  up  as  follows:  (1)  a  property  tax  plus  a  general  income 
tax;  (2)  a  property  tax  plus  a  partial  income  tax;  (3)  a  prop- 
erty tax  plus  a  supplementary  income  tax,  in  the  sense  that 
only  the  surplus  income  above  a  certain  percentage,  supposed 
to  represent  the  interest  of  the  taxable  property,  is  assessed; 
(4)  a  real  property  tax  plus  a  general  income  tax.    Only  three 
of  the  smaller  cantons  still  hold  to  the  general  property  and 
the  poll  taxes;  while  only  one  canton  clings  to  the  once  universal, 
but  still  more  primitive,  system  of  the  land  tax. 

This  is  the  one  great  lesson  to  be  drawn  from  Swiss  experience. 
It  ought  to  be  sufficient  to  silence  all  those  enthusiasts  who 
cry  out  for  a  retention  of  the  present  American  system,  and 
point  with  triumph  to  the  only  democratic  republic  in  Europe 
as  practising  the  same  methods.  On  the  contrary,  the  one  great 
effort  of  the  Swiss  legislatures  during  the  past  half-century  has 
been  to  supersede  the  general  property  tax,  not  necessarily 
by  the  income  tax,  but  by  some  form  of  income  taxation— by 
some  system  which,  directly  or  indirectly,  makes  not  property, 
but  product,  the  basis  of  taxation.  As  Professor  Schanz  sums 
It  up:  "Ucberall  drangt  sich  eben  mit  elementarer  Gewalt  der 
Gedanke  durch,  dass  es  doch  nicht  das  Vermogen,  sondern  das 
Emkommen  ist,  welches  man  eigentlich  treffen  will." 
The  next  striking  fact  in  Swiss  experience  is  this,  that  where 


mi 


if 


570 


■  :| 

J.      .'j 


i 


ESSAYS  IN  TAXATION- 


the  general  property  tax  is  utilized  as  a  subordinate  part  of 
the  tax  system,  or  is  employed  in  more  primitive  communities, 
or  with  a  low  tax  rate,  it  works  fairly  well.  But  as  soon  as  an 
attempt  IS  made  to  defray  the  larger  part  of  the  expenditures  of 

s' tltwl  hX"?'*'"','^^.*)'"  ^*'"'"""'  P^^P^^y  '^^'  *h"«  neces- 
sitating a  high  rate,  which  in  terms  of  income  is  equivalent  to 

Sirh  J°*f -^  ""•'■'^.P^'"  ''''''  '*  •«  ^  lamentable'failur^S 

nature  is  about  the  same  the  world  over,  and  where  the  condi- 
tions in  Switzerland  are  at  all  comparable  to  those  in  the  United 
Mates,  the  failure  of  the  general  property  tax,  as  the  chief  source 
of  revenue  IS  equally  marked.' 

Let  us  now  leave  these  two  facts,  which  might  amply  serve 
as  a  text  for  a  whole  volume,  and  turn  to  some  of  the  Xr 

of  taxation  of  corporations  as  a  whole,  but  presents  the  facts, 
the  most  important  of  which  have  been  used  in  another  chapte; 
of  the  present  volume.  Other  points  upon  which  the  Swiss 
experience  is  extremely  instructive  are  the  different  rates  of 
taxation  for  various  kinds  of  property;  the  methods  of  assess- 
inent,  according  to  market  value,  insurance  value  or  par  value- 
twlnT^  'T  °f  "-huf  h  or  other  property;  the  distinction  be^ 
tween  funded  and  unfunded  income;  and  the  subject  of  double 
taxation  in  all  its  various  forms.  But  the  four  chief  points  which 
deserve  special  emphasis  are  these:  the  methods  of  controlling 
assessments,  the  question  of  progressive  taxation,  the  succession 
taxes  and  the  system  of  local  taxation.  «-*.ession 

Switzeriand,  like  the  United  States,  has  tried  all  forms  of 
assessment  for  the  general  property  tax-self-assessment  and 
official  assessment,  oaths  and  no  oaths,  publicity  and  secrecy; 
and  these  have  proved  equally  inefficient.  One  institution,  how- 
ever, has  been  developed  in  the  last  few  decades  that  is  peculiar 
to  Switzeriand.     It  is  that  of  the  inventory  (Inventarisation). 

^L'^y^,'"  Fu^f  '"':?•  ^''  ™"'<^  P-'^'^^ty  '«  ««=ed  by  the 
government  and  held  until  an  exact  inventory  is  made.    If  this 

discloses  fraud  in  the  previous  self-assessments,  punitive  taxe^ 

must  be  paid,  ranging  m  some  cantons  over  a  period  of  ten  years. 

■This  point  was  also  subsequently  emphasized  by  «renville  Les  im-nAii, 

?^pmrTr.Ts^,lT'  -^-- -™t'y  by  Bullock:' Ve^Ge^d 
rroperty  lax  n  Switzerland,"  m  Addresses  and  Proceedings  of  the  Fourth 
C<»^.ra„ce  of  the  IntenuUional  Tax  Association,  Columbus,  1911,  p.  53 


I 


|l    I 


RECENT  LITERATURE  IN   TAXATION  571 

This  method  of  control  is  based  on  the  right  idea;  but  it  has  its 
objectionable  sides.  It  must  be  distressing,  to  say  the  least  to 
the  family  of  the  deceased  when  the  tax  officials  clap  their  seals 
on  the  property,  as  it  were  in  the  very  chamber  of  death  It 
has  also  its  weak  sides,  for  those  who  have  even  a  short  time  to 
prepare  for  death  commonly  give  away  a  large  part  of  their 
property.  Again,  the  inventory  naturally  becomes  a  less  trust- 
worthy gmde  the  further  back  we  go,  so  that  at  its  best  it  can 
serve  only  as  a  partial  index.  But  notwithstanding  these  defects 
It  has  done  good  service  in  increasing  the  tax  receipts,  and  it 
forms  to-day  one  of  the  chief  subjects  of  dispute  in  the  Swiss 
cantons. 

Another  point  which  has  attracted  attention  is  that  of  pro- 
gressive taxation.  Switzerland  has  now  definitively  accepted 
the  principle  of  graduated  taxation,  and  the  cantons  apply  it 
not  only  to  inheritance  and  to  income  taxes  but  also  to  property 
taxes  Especially  since  1870,  a  large  majority  of  the  common- 
wealths have  inserted  the  principle  into  their  constitutions, 
and  only  a  few  constitutions  fix  the  limit  of  the  progression 
The  system,  far  from  causing  any  wholesale  exodus  or  any  such 
startling  confiscation  as  we  read  of  from  time  to  time  in  the 
newspapers,  has  proved  so  satisfactory  that,  wherever  tried 
it  has  never  been  abandoned.  ' 

Thirdly,  about  two-thirds  of  the  Swiss  commonwealths  have 
rounded  out  their  system  of  direct  taxation  by  taxes  on  inherit- 
ances and  on  bequests.  This  movement  is  an  old  one,  and  has 
gone  hand  in  hand  with  the  movement  to  supplement  the  prop- 
erty tax  by  an  income  tax.  The  United  States  are  still  in  the 
first  phases  of  the  reform;  for  until  very  recently  the  agitation 
was  confined  to  an  extension  of  the  collateral  inheritance  tax 
Switzerland  has  passed  beyond  this  phase,  for  its  system  applies 
to  all  inheritances  and  bequests,  with  a  rate  ranging  from  a 
fraction  of  one  per  cent  in  Zug,  to  as  much  as  twenty-five  per 
cent  or  even  more  for  non-relatives  in  Uri. 

Finally,  the  methods  of  local  taxation  are  instructive.  Only 
a  few  cantons  pursue  the  same  system  for  both  local  and  com- 
monwealth purposes.  In  most  cases  the  income  tax  is  a  com- 
monwealth tax,  while  the  local  tax  is  a  property  tax,  and  often  a 
real  property  tax.  In  addition  to  the  local  property  tax,  how- 
ever, we  find  very  generally  a  local  "household"  tax,  which  is 
practically  a  system  of  poll  taxation  designed  to  reach  some  of 
those  who  escape  the  real  property  tax.    The  local  tax  system 


"i 


h 


» 


'^imi 


i  II 


If  I 


572 


ESJSAYS  IN  TAXATION 


IS  moreover  marked  by  two  significant  facts.  In  the  first  place, 
the  Idea  of  progression,  which  is  commonly  applied  to  the 
commonwealth  taxes,  is  absent  in  the  local  taxes,  which  are 
almost  uniformly  proportional.  Secondly,  the  exemption  of 
debts—mortgage  debts  as  well  as  others— is  permitted  in  state 
taxes,  but  it  is  allowed  only  to  a  very  limited  degree  in  local 
taxes. 

Enough  has  been  said  to  show  the  importance  of  Professor 
bchanz  s  work.  It  does  not  pretend  to  discuss  questions  of 
theory,  and  yet  almost  every  page  contains  matter  of  more 
significance  to  the  average  American  than  whole  chapters  of 
some  of  the  usual  manuals  of  finance.  In  some  few  questions  of 
hnance  Switzerland  has  a  little  to  learn  from  us;  in  most  matters 
we  have  important  lessons  to  learn  from  Switzerland.  What 
these  lessons  are  has  been  only  faintly  outlined  in  the  above  re- 
marks: but  It  is  to  be  hoped  that  their  full  significance  will  ere 
long  be  appreciated  by  every  American  student  and  by  every 
American  legislator. 

V.  England 

English  economic  literature  has  not  hitherto  been  very  fortu- 
nate m  Its  systematic  studies  of  fiscal  problems.    The  writers 
prior  to  Adam  Smith  concerned  themselves  only  with  scattered 
questions  of  temporary  practical  interest,  and  dealt  with  them 
in  the  same  scrappy  manner  which  characterized  their  treatment 
of  economic  problems  in  general.    There  was,  in  England  at  all 
events,  no  true  science  of  political  economy;  there  could  not  well 
be  a  science  of  finance,    Adam  Smith,  taking  his  cue,  perhaps, 
from  the  French  writers,  for  the  first  time  sought  to  connect 
fascal  questions  with  those  of  social  economy.    In  his  happy  way 
he  combined  the  abstract  discussion  of  fundamental  theories 
with  the  explanation  and  criticism  of  actual  conditions,  avoid- 
ing on  the  one  hand  the  metaphysical  vagaries  of  the  Physiocrats 
and  on  the  other  the  plodding  monotony  of  the  German  ''cam- 
erahstic  "  complications.    But  while  Adam  Smith  gave  a  decided 
impulse^to  the  study  of  fiscal  problems  on  the  continent,  and  thus 
initiated  a  movement  which  has  resulted  in  the  elaboration  of 
the  modern  science  of  finance,  his  success  in  arousing  a  like  in- 
terest m  England  was  far  less  marked,  although  his  influence  on 
l!.nglish  fiscal  practice  was  great.    The  mighty  genius  of  Ricardo, 
however,  turned  at  once  to  the  core  of  the  problem.    He  confined 
himself  almost  exclusively  to  an  investigation  of  incidence, 


H 


RECENT  LITERATURE  IN   TAXATION  573 

regarding  a  tax  simply  as  an  addition  to  the  cost  of  production 
and  treating  all  tax  phenomena  as  mere  illustrations  of  changes 
in  value.    Taxation  with  him  became  a  minor  part  of  general 
economic  theory.    So  weighty  was  his  influence  that  even  Mill 
who  m  other  parts  of  his  Political  Economy  pursued  a  quite  dif- 
ferent policy,  gave  in  his  fifth  book  nothing  but  a  succinct  analy- 
sis of  the  shifting  and  general  effects  of  taxation,  scarcely  deign- 
ing to  descend  to  the  facts  of  everyday  life  or  to  do  more  than 
touch  upon  the  difficult  details  of  principle.    Although  a  few 
other  writers  did  more  than  this,  their  discussions  were  forgotten 
amid  the  plaudits  showered  on  Ricardo  and  Mill.     Thus  it 
happened  that,  while  on  the  one  hand  we  had  numerous  descrip- 
tive works,  written  for  practical  purposes,  on  the  chief  facts  of 
public  finance,  and  on  the  other  hand  numerous  appendices 
to  general  treatises  on  economics,  dealing  with  a  few  points  in 
fiscal  doctrine,  there  came  to  be  an  almost  complete  divorce 
between  fact  and  theory.    The  practical  writers  did  not  concern 
themselves  with  theory,  and  the  economists  were  for  the  most 
part  content  to  work  in  what  might  be  called  a  fiscal  vacuum. 
McCulloch  was  the  one  important  writer  to  form  an  exception, 
and  he  was  not  sufficiently  successful  to  find  either  admirers  or 
successors. 

Another  reason  which  may  be  adduced  to  explain  the  more 
rapid  growth  of  the  science  of  finance  in  France  and  in  Germany 
was  their  relatively  inferior  fiscal  system.    It  is  not  the  excel- 
lence but  the  defects  of  economic  life  that  have  always  led  to 
the  elaboration  of  economic  theory.     The  shortcomings  of 
mercantilism  produced  Adam  Smith;  the  abuses  of  the  ancien 
regime  brought  forth  the  Physiocrats;  the  dangers  of  levelling 
and  the  evils  of  the  poor  law  gave  us  Malthus;  the  currency 
confusion  and  the  corn  law  were  responsible  for  Ricardo.    Had 
there  been  no  agricultural,  no  industrial,  no  commercial  troubles, 
we  should  not  have  had  Mill  and  the  whole  host  of  modern  spe- 
cialists.   So  with  the  problems  of  public  finance.    The  abuses 
on  the  continent  were  so  serious  that  they  gave  rise  to  important 
political  contests,  and  thus  led  the  scientists  to  attempt  a  general 
clearing  up  of  vexed  questions  in  fiscal  policy.    In  England  tax 
problems   (with  the  exception  of  the  free-trade  controversy, 
which  was  far  more  than  a  mere  matter  of  taxation)  did  not 
agitate  the  people  to  any  great  extent,  and  their  solution  was 
contentedly  left  to  the  practical  common  sense  of  the  English 
statesmen.    It  is  significant  that  in  the  one  department  of  public 


V 


574 


ESSAYS  IN   TAXATION 


f 


I    'I 


finance  which  did  seriously  enter  into  politics,  namely,  that  of 
public  debts,  the  English  writers  have  done  better  work  than 
those  of  the  continent.  But  the  comparative  excellence  of  the 
English  revenue  and  budgetary  system,  combined  with  the 
general  prosperity,  in  themselves  contributed  to  hinder  the 
growth  of  fiscal  theory. 

Of  late  years  the  conditions  have  changed.  The  dispropor- 
tionate increase  in  public  expenditures  and  the  immense  develop- 
ment of  local  needs  have  materially  strengthened  the  conscious- 
ness of  fiscal  pressure,  while  the  growth  of  democracy  on  the 
one  hand  and  the  complications  of  recent  industrial  development 
on  the  other  have  brought  to  the  front  questions  of  theoretic 
justice  which  necessitate  the  revision  of  fundamental  doctrines. 
In  England  as  in  America,  fiscal  problems  have  become  no  less 
important  than  in  continental  Europe.  It  is  thus  natural  to 
expect  henceforth  a  deeper  study  of  the  subject-matter  by  those 
who  in  the  wilderness  of  confusing  party  contests  blaze  out  the 
path  of  truth  and  progress. 

Professor  Bastable's  book  on  Pithlic  Finance  ^  is  the  first 
scientific  result  of  this  new  interest  in  fiscal  problems  in  England 
His  volume  marks  a  distinct  epoch  in  the  history  of  English 
economics;  for  it  is  the  first  attempt  to  set  before  English  readers 
the  science  of  finance  in  its  modem  garb.  To  many  it  will  intro- 
duce an  entirely  new  set  of  discussions:  and  especially  to  the 
English  reader  who  is  not  familiar  with  foreign  tongues,  the 
volume  will  be  welcome.  This  will  be  our  excuse  for  dealing 
with  It  so  fully.  ^ 

To  all  those  acquainted  with  the  Theonj  of  International  Trade, 
published  a  few  years  ago,  as  well  as  with  his  recent  Cmnmerce 
of  Nations,  Professor  Bastable  is  known  as  a  clear  and  careful 
thinker,  without  any  intellectual  vagaries,  and  with  marked 
sobriety  of  judgment.  The  same  traits  conspicuously  reappear 
m  the  present  volume,  and  they  are  reinforced  by  evidence  of 
accurate  scholarship  and  familiarity  with  foreign  literature 
In  order  to  be  sure  of  one's  o^vn  conclusions,  one  must  first  know 
what  others  have  said;  and  it  is  the  neglect  of  this  elementary 
rule  that  consigns  so  much  of  so-called  scientific  writing  to  the 
waste-basket.  It  must  not  be  supposed,  however,  that  Professor 
Bastable  is  a  slavish  adherent  of  his  foreign  predecessors.  His 
volume  IS  by  no  means  without  independent  suggestions;  and 

om/'if  !h  ^t?^'"-  .,^y  .C^^- Ra«table,  LL.D.,  Professor  of  PoUtical  Econ- 
omy  m  the  University  of  Dublin.  London,  1892. 


RECENT  LITERATURE  IN  TAXATION  575 

it  is  precisely  this  independence  of  thought  that  invites  occa- 
sional criticism. 

In  the  first  place,  it  is  to  be  regretted  that  Professor  Bastable 
does  not  employ  the  term  '^ science  of  finance.^'    It  is  true  that 
finance"  is  used  in  English  to  include  private  as  well  as  public 
finance,  and  that  several  books  on  ''finance,"  like  those  of 
Jevons  and  Giffen,  deal  chiefly  with  monetary  problems      This 
unclearness,  however,  attaches  to  the  word  in  foreign  languages 
to  almost  the  same  degree.    The  French  speak  of  la  haute  finance 
and  the  number  of  titles  on  what  might  be  called  "private"  or 
monetary"  finance  is  legion;  yet  this  has  not  prevented  them 
trom  using  the  phrase  science  de  finance  or  science  des  finances 
as  the  techmcal  term  for  public  finance.    The  whole  matter  was 
there  discussed  and  laid  to  rest  years  ago  by  Joseph  Gamier, 
in  Italy  and  in  Germany  the  matter  of  terminology  has  reached 
a  similar  settlenaent.     It  is  therefore  to  be  deprecated  that 
Professor  Bastable  should  not  have  pre-empted  the  phrase  for 
English  scientific  use.    Sooner  or  later  we  shall  have  to  conform 
to  the  usage  of  the  French  and  the  Italians. 

The  introductory  chapter  on  the  history  of  the  science 
gives  a  clear  picture  of  the  main  lines  of  development.  Some 
mention  might,  perhaps,  have  been  made  of  the  discussions  in 
mediaeval  Florence,  which  in  some  points  foreshadow  modern 
doctrmes.  Moreover,  if  a  fuller  history  of  the  science  in  En- 
land  is  ever  written,  attention  will  have  to  be  paid  to  writers 
to  whom  may  be  traced  much  of  what  is  to-day  current  coin  in 
hscal  discussions.  To  speak  only  of  nineteenth-centurv  authors 
i<  rend  Craig,  Buchanan,  Buckingham  and  Sayer  will  be  able 
to  hold  their  own  with  many  of  the  German  writers  whom 
their  compatriots  delight  to  honor. 

An  important  point  in  which  the  volume  differs  from  some 
others  IS  the  inclusion  of  the  subject  of  public  expenditures. 
It  IS  a  difficult  and  delicate  task  rightly  to  proportion  the 
space  to  be  devoted  to  this  topic  in  a  work  on  finance.  From 
one  point  of  view  public  expenditure  is  simply  administration- 
trom  another  point  of  view  it  is  political  economy  in  the  original 
sense  of  the  term.  How  far  government  should  assume  definite 
lunctions  is  a  problem  of  economic  politics;  in  what  manner  it 
should  actually  carry  on  these  functions  is  a  problem  of  ad- 
ministration. Yet  almost  every  political  or  administrative 
act  involves  some  outlay,  and  is  in  so  far  a  fit  subject  for  dis- 
cussion m  systematic  works  on  finance.     Professor  Bastable 


•576 


ESSAYS  IN  TAXATION 


1^  li 
if 


it 


in  dealing  with  this  branch  of  his  work,  has  avoided  on  the 
one  hand  unsuitable  details,  and  on  the  other  mere  common- 
places. 

It  is  in  the  next  three  books  that  are  to  be  found  most  of  the 

controverted  doctrmes,  and  it  is  naturally  here  that  the  critic 

will  be  apt  to  take  issue  with  the  author.    Professor  Bastable 

first  takes  up  the  classification  of  public  revenues.     He  sees 

the  inadequacy  of  the  older  continental   division  into  taxes 

and  lucrative   prerogatives   (regalia)   and   correctly  relegates 

the  latter  class  to  the  limbo  of  vbermmdener  Standpunkte, 

But  he  IS  equally  aggressive  in  his  onslaught  on  the  class  of 

fees,    the  creation  of  which  he  ascribes  to  ''a  want  of  analytic 

power  in  the  originator."     He  simply  distinguishes  between 

taxes  and  what  he  calls  in  some  places  '' semi-private  economic 

mcome     and  m  other  places  '' public  economic  income." 

It  will  he  questioned  whether  Professor  Bastable  is  not  here 
takmg  a  step  backward.    He  shows,  it  is  true,  the  many  incon- 
sistencies of  recent  writers.    But  does  it  not  seem  unwise  to  cut 
the  knot  in  despair  of  untying  it?    In  refusing  to  acknowledge 
fees  as  a  separate  class,  the  author  only  creates  fresh  difficulties. 
Where  for  instance,  shall  we  put  school  fees?    They  are  surely 
not  industrial  income;  and  Professor  Bastable  himself  would 
not  class  them  among  taxes.   And  where  shall  we  put  the  charges 
for  marriage  certificates,  and  sheriff's  fees,  and  copyright  pay- 
ments, and  a  host  of  other  similar  receipts?    The  author  later 
speaks  repeatedly  of  "economic  receipts"  as  different  from 
lees,  as  well  as  from  taxes,  seeming  to  forget  that  in  the  eariier 
portions  of  the  volume  he  includes  fees  in  the  "economic  re- 
ceipts.      Further,  why  speak  so  frequently  later  of  the  "fee 
principle    as  opposed  to  the  "tax  principle,"  if  fees  do  not  form 
a  separate  class? 

Again,  Professor  Bastable  sharply  separates  economic  from 
compulsory  receipts;  but  he  fails  to  distinguish  between  different 
kinds  of  compulsory  receipts,  and  assumes  that  all  of  them  are 
taxes.  Where,  then,  shall  we  put  fines  and  penalties?  They  are 
certainly  compulsory  receipts,  and  just  as  certainly  not  taxes. 
Where,  too,  shall  we  put  special  assessments,  which  are  com- 
pletely  i^ored  by  him?  In  fact,  it  almost  seems  as  if  the  author 
in  the  endeavor  to  simplify  matters,  has  really  added  to  our  diffi- 
culties. 

A  similar  criticism  may  be  urged  against  his  classification 
of  taxes.     He  objects  to  all  the  recent  methods,  and  reverts 


RECENT  LITERATURE  IN  TAXATION  577 

to  what  is  virtually  Adam  Smith's  classification  into  primary 
and  secondary.  But  it  is  hard  to  see  why  a  tax  on  the  property 
of  a  living  person  should  be  primary,  and  that  on  the  property 
of  a  deceased  person,  in  the  shape  of  an  inheritance  tax,  second- 
ary; or  why  a  tax  on  th6  business  of  a  corporation  should  be 
primary,  and  a  tax  on  the  receipts  of  a  corporation  secondary. 
It  may  also  be  noted  that,  when  he  calls  attention  to  the  dis- 
tinction between  direct  and  indirect  taxes  made  by  practical 
"financiers,"  his  statement  applies  only  to  French,  not  to 
English  or  to  American  practice. 

The   book  on  the  whole  exhibits  independent  judgment, 
although  in  a  few  instances  the  author  allows  his  German 
models  to  influence  him  unduly  in  matters  of  nomenclature. 
Thus  he  introduces  the  German  distinction  between  the  "ob- 
ject" and  the  "subject"  of  taxation,  meaning  by  the  former 
the  thing  on  which,  and  by  the  latter  the  person  on  whom  the 
tax  is  imposed.    This  is  not  English.    When  we  speak  of  the 
subjects  of  taxation,  we  mean  not  the  taxpayers  (or  "subjects," 
in  Professor  Bastable's  language)  but  the  phenomena  subjected 
to  taxation  (or  "objects,"  in  Professor  Bastable's  language). 
And  when  we  speak  of  the  objects  of  taxation,  we  commonly 
mean  the  aims  of  taxation,  not  the  things  taxed.     In  other 
words,  the  author's  (German)  "tax  object"  is  really  the  English 
"subject";  and  his  "tax  subject"  is  the  English  "taxpayer" 
or  "taxbearer,"  as  the  case  may  be.     Again,  the  terms  "for- 
ward incidence,"   "backward  incidence,"  and  "diffused  inci- 
dence" are  not  English;  moreover,  they  confound  the  terms  inci- 
dence and  shifting.    Finally,  when  Professor  Bastable  employs 
the  word  "rated"  tax  as  opposed  to  "apportioned"  tax,  he  is 
Ignoring  the  equivalent  term,  "percentage"  tax,  which  has  be- 
corne  quite  common,  and  which  clearly  expresses  the  meaning 
on  its  very  face.^ 

But  all  these  matters,  it  may  be  said,  are  of  minor  importance. 
The  crucial  point  is  not  so  much  the  arrangement  and  terminolgy 
as  the  substance,  and  in  the  substance  of  the  book  the  author 
must  meet  with  greater  appreciation. 

Passing  over  the  chapters  on  the  state  domain,  the  industrial 
domain,  and  the  state  as  capitalist,  in  which  he  always  seeks 
to  maintain  the  golden  mean  between  the  laissez-faire  theories 
of  the  eariier  English  writers  and  the  semi-socialistic  doctrines 

^  In  the  later  editions  some  of  these  defects  have  been  removed.    • 


ll  1 1 


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ESSAYS  IN  TAXATION 


of  the  modem  German  authors,  we  come  to  the  more  difficult 
problems  of  taxation. 

A  good  account  is  given  of  the  theory  of  benefit,  which  is 
discarded  as  the  general  basis  of  taxation;  but  less  satisfactory 
IS  the  discussion  of  the  theory  of  faculty.    Professor  Bastable 
speaks  of  Its     convenient  vagueness,"     but  does  not  reallv 
make  any  serious  effort  to  give  a  deeper  analysis  of  the  doctrine. 
He  tells  us  of  Mill's  doctrine  of  "equal  sacrifice,"  but  does  not 
succeed  in  correlating  it  with  the  doctrine  of  ability.    His  whole 
discussion  of  the  theory  of  progressive  taxation  is  therefore  not 
quite  up  to  the  level  of  recent  investigation.    On  other  points, 
too    he  IS  very  conservative.     He  opposes  the  differentiation 
of  the  income  tax,  which  was  demanded  by  Mill,  accepted  bv 
Disraeh  and  recently  introduced  by  Lloyd-George;  he  seems  to 
be  opposed  to  graduation  in  the  inheritance  tax,  which  was  also 
demanded  by  Mill  and  which  has  now  been  definitely  introduced 
into  Enghsh  practice;  and  he  even  differs  from  the  conservative 
French  writers  in  disapproving  of  progres.sion  in  the  income  tax 
as  a  counterpoise  to  regression  in  other  taxes. 

On  the  other  hand,  the  discussion  of  the  incidence  of  taxa- 
tion ,s  good.     The  author  shows  the  weakness  of  both  the 
diffusion  theory  and  the  absolute  theories  of  Smith  and  of 
Kicardo,  and  calls  attention  to  the  complicating  conditions  of 
modern  society     It  might  be  urged  that  his  analysis  is  not 
rigorous  enough  m  the  case  of  the  taxation  of  profits;  that  not 
enough  attention  is  called  to  the  distinction  between  monopo- 
lies and  competitive  undertakings;  that  tlie  house  tax  is  viewed 
only  from  the  characteristically  English  point  of  view  as  being 
assessed  on  tiie  occupier;  and  that  the  general  capitalization 
theory  is  not  brought  into  due  prominence.     Nevertheless, 
the  treatment  as  a  whole  is  far  superior  to  that  found  in  most 
ot  the  manuals  on  public  finance. 

Perhaps  the  least  satisfactory  part  of  the  work  is  the  dis- 
cussion of  universality  of  taxation.  Double  taxation,  as  we 
know  IS  of  importance  chiefly  in  federal  states;  and  that  is  no 
doubt  the  reason  why  a  book  written  primarily  for  Englishmen 
pays  so  httle  attention  to  it.  But  international  relations  are 
here  of  mcreasing  importance  and  deserve  more  than  the  half- 
page  alloted  to  them.     Moreover,  the  conclusion  itself  is  not 

^r,?M  h".*r  w.    ■"^^'  ""'■"  ™°^^'"  ^"'"tion-"   he  says, 
would  be  that  the  income  tax  should  be  levied  by  the  country 

ot  residence,  the  land  or  property  taxes  by  that  of  situation." 


•I  If: 


RECENT  LITERATURE  IN  TAXATION  579 

What,  then,  shall  be  done  if  the  income  is  derived  from  land- 
or  conversely,  if  the  property  consists  of  intangible  goods? 
Whatever  we  say  about  this,  it  is  to  be  regretted  that  the  author 
passes  over  the  other  forms  of  double  taxation.  Even  if  there 
were  no  space  for  details,  the  main  points  of  the  controversy 
should  at  all  events  have  been  outlined. 

The  following  book,  on  the  several  kinds  of  taxes,  shows 
the  author  at  his  best.  A  broad  knowledge  of  the  facts  of  taxa- 
tion in  all  the  important  countries,  and  a  wide  acquaintance 
with  the  special  literature,  enable  him  to  give  a  concise  and  clear 
account  of  actual  conditions,  as  well  as  of  the  chief  movements 
for  reform.  He  suggests  a  judicious  combination  of  the  three 
principal  forms  of  taxation  as  best  calculated  to  reach  substan- 
tial justice. 

So  far  as  the  practical  problems  of  American  taxation  are 
concerned,  Professor  Bastable  opposes  the  suggestions  for  a 
direct  income  tax  to  replace  the  local  tax  on  personal  property, 
and  he  also  deprecates  the  taxation  of  gross  receipts  of  corpora- 
tions.    His  statement  that  'Hhe  most  promising  sources  of 
state  revenue  seem  to  be  the  real  property  and  the  license  taxes" 
IS,  however,  obviously  a  slip.    Americans  will  also  take  exception 
to  the  assertion  that  ''taxation  of  inheritances  is  unsuited  for 
a  community  where  the  family  is  the  unit  of  society  and  property 
IS  really  held  by  corporations,  not  by  individuals."     There  is 
an  obvious  discrepancy  between  this  and  the  author's  state- 
ment that  ''taxation  of  corporations  is  the  taxation  of  their 
members."^    This  last  statement  again  is  unclear.     Do  the 
''members"  of  a  corporation  mean  its  stockholders,  or  its  bond- 
holders, or  both?     The  discussion  of  these  questions,  which 
have  led  to  some  of  the  most  perplexing  problems  of  public 
finance  m  America  as  elsewhere,  ought  not  to  be  so  lightlv 
"eliminated." 

We  have  not  hesitated  to  call  attention  to  some  of  the  minor 
defects  in  Professor  Bastable's  volume  or  to  indicate  a  belief 
that  It  will  not  be  found  wholly  satisfactory  for  the  American 
student.  We  must,  however,  remember  that  it  was  written 
primarily  for  Englishmen.  It  is  to  be  hoped  that  no  one  will 
leave  these  criticisms  with  the  idea  that  the  book  can  be  lightly 
cast  aside.  It  is  so  admirable  in  arrangement,  so  accurate  in 
statement,  so  catholic  in  temper,  so  sagacious  in  judgment, 
and  so  broad  in  erudition,  that  it  will  undoubtedly  give  a  new 
impetus  to  the  scientific  study  of  fiscal  problems  in  England 


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580  ESSAYS  IN  TAXATION 


VI.  United  States 

When  Professor  Bastable's  book  appeared  the  hope  was  ex- 
pressed that  there  might  soon  appear  in  America  a  similarly 
comprehensive  treatise,  intended  primarily  for  our  own  public 
and  dealing  more  specifically  with  the  problems  that  are,  in  a 
measure,  peculiar  to  the  United  States.  This  hope  was  soon 
realized  by  the  publication  of  Professor  Adams's  Science  of 
Finance,^  which  at  once  commanded  attention  as  a  signal  con- 
tribution to  economic  literature. 

That  such  a  book  is  timely  it  is  scarcely  necessary  to  say.  The 
United  States  has  so  rapidly  outgrown  the  swaddling  clothes  of 
its  infant  economic  surroundings,  it  has  stepped  with  such 
prodigious  strides  from  its  youthful  social  environment  to  the 
complex  conditions  of  a  full-grown  industrial  society,  that  we 
are  suddenly  confronted  on  all  sides  by  the  new  problems  of 
pohtical,  economic  and  social  maturity  which  are  at  present 
engaging  the  public  mind.  America  presents  in  some  respects 
most  curious  contrasts.  It  is  at  once  the  youngest  and  the  oldest 
of  economic  societies — at  once  the  most  youthful  and  the  most 
mature  of  social  experiments.  It  is  the  youngest,  in  the  sense 
that  there  are  still  in  our  territory  vast  tracts  untouched  by 
plough  or  harrow,  awaiting  the  coming  of  the  first  settler  and 
needing  only  irrigation  to  convert  the  desert  into  a  garden.  It 
is  young,  because  there  are  other  huge  sections  of  the  country 
which  are  only  one  step  removed  from  the  primitive  agricultural 
stage,  in  which  the  local  life  is  still  largely  dominated  by  frontier 
conditions — conditions  analogous  to  those  which  the  old  world 
faced  centuries  ago.  In  another  sense,  however,  America  is  not 
young,  but  old.  Nowhere  on  the  face  of  the  globe  has  capital 
been  applied  to  productive  purposes  with  such  intensity  and 
such  energy.  Nowhere  has  man's  victorious  contest  with  the 
powers  of  nature  been  waged  with  such  intelligence  and  Avith 
such  relentless  vigor.  Nowhere  have  the  captains  of  industry 
prosecuted  their  quest  for  industrial  supremacy  with  such  alert- 
ness and  with  such  ability.  As  a  consequence,  nowhere  have 
the  most  advanced  forms  of  a  highly  organized,  fully  differen- 
tiated and  thoroughly  complex  industrial  organism  been  evolved 
with  such  startling  rapidity  and  with  such  complete  success. 

1  The  Science  of  Finance:  an  Investigation  of  Public  Expenditures  and 
Public  Revenues.  By  Henry  Carter  Adams,  Ph.D.,  LL.D.  New  York, 
1898. 


RECENT  LITERATURE  IN  TAXATION  581 

In  no  department  of  social  and  political  life  have  these  warring 
forces  engendered  more  confusion  than  in  the  domain  of  public 
finance.    In  former  times  the  fiscal  problem  was  comparatively 
simple.    The  collective  wants  of  individuals  were  small  in  com- 
parison with  their  private  wants;  public  expenditure  was  in- 
significant; and  the  needs  of  government  revenue  were  easily 
satisfied.    With  the  growth  of  industrial  democracy,  however, 
all  this  has  been  suddenly  changed.    A  scale  of  public  expendi- 
ture which  would  have  appeared  absurdly  lavish  to  former 
generations  now  seems  barely  adequate  to  modern  necessities. 
The  resulting  prodigious  increase  in  public  revenues  has  called 
into  being  problems  of  the  utmost  nicety,  not  because  the  growth 
of  these  revenues  is  necessarily  more  rapid  than  that  of  the 
private  wealth  on  which  they  are  based,  but  because  the  con- 
stituent elements  of  this  private  wealth  have  in  themselves 
become  so  complex  and  have  so  intertwined  themselves  with 
the  integrated  forms  of  modern  industrial  life.    What  is  peculiar- 
ity confusing  in  the  American  situation  is  the  fact  that,  on  the 
one  hand,  we  have  sections  where  the  economic  conditions, 
and  therefore  the  fiscal  conditions,  are  still,  as  compared  with 
the  great  mass  of  modern  communities,  of  the  primitive  type; 
while,  on  the  other  hand,  in  numerous  parts  of  these  sections 
themselves  there  have  been  grafted  upon  the  still  dominant  and 
persistent  primitive  stock  the  shoots  of  the  newer  industrial 
type;  or,  to  put  it  in  other  words,  although  the  basis  of  such 
communities  is  still  primarily  agricultural,  the  newer  methods 
of  transportation,  as  well  a^  the  more  modem  media  of  exchange 
and  distribution,  have  superimposed  upon  the  simplicity  of 
the  old  and  still  persistent  the  complexity  of  the  new  and  ever 
extending.    The  consequence  is  that  the  fiscal  conditions  of  this 
country  to-day  are  supremely  heterogeneous  and  that,  because 
of  this  contest  of  the  old  with  the  new,  we  are  all  still  groping 
almost  in  the  dark,  dissatisfied  in  the  more  progressive  com- 
munities with  the  survivals  of  old  conditions,  and  trying  to 
discern  in  the  dim  light  of  the  future  the  fiscal  expression  of  the 
newer  conditions  which  are  soon  to  become  universal. 

The  appearance  of  Professor  Adams's  work  bears  eloquent 
testimony  to  this  change  of  view.  We  have  for  a  long  time  had 
American  treatises  on  political  economy,  although  these  treatises 
have  been,  until  comparatively  recent  times,  for  the  most 
part  simply  copies  of  their  English  predecessors  rather  than 
adaptations  to  our  own  peculiar  conditions.    In  the  science  of 


fl 


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ESSAYS  IN  TAXATION 


finance,  however,  there  have  been  no  American  treatises,  just  as 
there  have  been  until  recently  no  English  ones,  chiefly  because 
the  fiscal  problems  have  been  so  simple  as  not  to  warrant  any 
separate  or  extended  discussion.    An  insignificant  addendum  to 
the  ordmary  work  on  political  economy  has  sufficed  for  the  con- 
sideration of  the  few  questions  that  have  presented  themselves 
For  the  reasons  mentioned  above,  however,  the  fiscal  problems 
have  now  come  to  the  very  forefront  of  modem  controversy; 
and  It  IS  time  for  the  science  of  finance  to  take  its  place  side  by 
Side  with  economics  in  the  narrower  sense;  for  while  economics 
proper  is  primarily  social  in  its  character,  laying  emphasis  on  the 
industrial  relations  of  man  to  man,  the  science  of  finance,  as  a 
part  of  the  broader  political  economy,  is  primarily  political, 
laying  the  emphasis  on  the  fiscal  relations  of  the  individual  to  the 
government.    The  appearance  of  a  comprehensive  treatise  on 
finance  accordmgly  marks  a  turning-point  in  the  history  of 
American  political  and  economic  literature;  and  when  such  a 
treatise  attempts,  as  none  of  its  English  or  continental  pred- 
ecessors have  done,  to  call  attention  to  the  close  connection 
between  changing  social  and  changing  fiscal  conditions,  it  is 
doubly  deserving  of  attention. 

A  word  should  first  be  said  regarding  the  formal  arrangement 
of  the  volume  before  us.    After  an  introductory  chapter  on  the 
character  of  the  science  and  the  nature  of  public  wants,  the 
subject  of  public  expenditure  is  taken  up  in  Part  I.    The  first 
book  of  this  part  deals  with  the  theory  of  public  expenditure- 
while  a  second  book,  to  our  surprise,  treats  of  the  budget.    Why 
the  budget  should  be  dealt  with  under  the  general  heading  of 
expenditure  is  not  apparent.    It  is  true  that  much  of  the  time 
spent  in  budgetary  discussion  in  modern  legislatures  is  devoted 
to  expenditure;  but  there  is  also  a  revenue  side  to  such  dis- 
cussion.    Another  departure  from  customary  methods  of  ar- 
rangement is  found  in  a  subdivision  of  the  book  on  the  budget, 
m  which  Professor  Adams  discusses  the  subject  of  financial 
orgamzation  and  administration.    It  may  be  urged  that  either 
this  subject  should  be  treated  separately  or  the  general  heading 
of  the  book  should  be  '^ Budgets  and  Financial  Organization." 
Part  II.  of  the  work  deals  with  public  revenue,  taking  up  in 
three  successive  books  the  public  domain  and  pubHc  industries, 
taxation  and  public  credit.     This  arrangement  is  followed  in 
pursuaiice  of  the  division  of  all  revenue  into  three  classes: 
direct,      derivative "  and  "anticipatory."    While  this  distinc- 


II 


RECENT  LITERATURE  IN  TAXATION 


583 


tion  is  clear  enough,  it  must  be  said  that  the  inclusion  of  credit 
under  the  head  of  revenue  is,  to  say  the  least,  unusual;  and  that 
the  choice  of  the  terms  "direct"  and  "derivative,"  to  mark 
the  difference  between  income  from  the  domain  and  income 
from  taxation,   is  not  entirely  beyond   criticism.     "Direct" 
revenue  is  defined  as  that  which  accrues  to  the  state  from  public 
ownership  or  management,  or  which  falls  to  it  by  virtue  of  its 
sovereign  character;  and  "derivative"  revenue  is  that  which 
forms  in  first  instance  a  part  of  the  income  of  the  citizen,  but 
which  is  paid  to  the  state  in  satisfaction  of  some  revenue' law. 
It  is  further  stated  that  "direct "  revenue  constitutes  a  positive 
addition  to  the  social  income,  while  "derivative"  revenue  is  a 
transfer  of  a  part  of  the  earnings  of  the  citizen  to  the  state.    In 
regard  to  the  first  point,  however,  it  is  to  be  noticed  that  all 
revenue  from  taxation  falls  to  the  state  in  virtue  of  its  sovereign 
character;  and  that,  on  the  other  hand,  much  of  the  so-called 
"direct  "  revenue  is  originally  a  part  of  the  income  of  the  citizen 
and  is  paid  in  virtue  of  some  revenue  law.    Post-office  charges, 
for  instance,  are  included  by  the  author  under  "direct"  reve- 
nue; yet  the  receipts  originally  form  part  of  the  income  of  the 

citizens,  and  are  paid  in  virtue  of  a  very  definite  revenue  law 

if  by  revenue  law  we  mean  a  law  which  prescribes  the  raising 
of  revenue.  Again,  referring  to  the  second  distinction,  it  must 
be  noted  that  "direct"  revenue,  no  less  than  "derivative" 
revenue,  implies  a  transfer  of  the  earnings  of  the  citizen  to  the 
state.  For,  even  if  the  government  rents  out  its  land,  or  runs 
its  industries  for  profit,  the  prices  are  paid  by  the  citizens,  and 
the  revenue  involves  a  transfer  of  the  earnings  of  the  citizens 
to  the  state.  While,  therefore,  the  intent  of  the  classification 
is  obvious,  it  cannot  be  said  that  the  nomenclature  is  a  very 
happy  one. 

One  other  feature  of  the  general  arrangement  may  be  men- 
tioned. Within  the  separate  books  themselves  there  is  nothing 
particularly  worthy  of  note  until  we  come  to  that  on  taxation. 
Here  the  arrangement  is  at  once  novel  and  interesting.  Begin- 
ning with  general  considerations,  successive  chapters  are  devoted 
to  the  principles  of  apportionment;  to  the  classification  and  char- 
acterization of  taxes;  to  the  manner  in  which  taxes  work,  to 
the  administrative  consideration  of  taxes;  and  to  suggestions 
for  a  revenue  system.  It  may,  perhaps,  be  urged  that  this 
necessarily  gives  a  somewhat  disjointed  account,  as  there  is  no 
place  where  any  particular  tax  can  be  judged  as  a  unit  from  every 


I 


)  [if    !• 


584 


ESSAYS  IN  TAXATION 


^l#i 


m 


point  of  view.     But  no  arrangement  can  satisfy  conflicting 
claims;  and  it  is  undeniable  that  the  one  adopted  in  this  treatise 
does  succeed  in  putting  a  fresh  aspect  on  some  familiar  topics. 
Coming  to  the  subject-matter  of  the  work,  attention  must 
first  be  directed  to  the  chief  merit  in  the  whole  presentation — 
the  masterly  power  of  analysis  disclosed  by  the  author.    The 
emphasis  is  everywhere  laid,  not  upon  facts  and  figures,  but 
upon  the  principles  involved;  and  to  those  who  approach  the 
subject  for  the  first  time,  as  well  as  to  those  already  familiar 
with  the  general  nature  of  the  problems,  the  serried  phalanx 
of  argument  upon  argument,  of  closely  reasoned  analysis  upon 
analysis,  must  be  both  a  surprise  and  a  delight.    Not  that  all 
is  new— for  here,  as  in  every  other  department  of  human  thought, 
one  can  build  only  upon  the  basis  of  the  known;  but  the  whole 
work  is  so  permeated  with  the  doctrines  of  continuity,  and  of 
the  essential  dependence  of  fiscal  upon  economic  conditions, 
that  almost  every  single  discussion  is  put  in  a  new  light.    The 
insistence  upon  principle  has  indeed,  as  the  French  say,  the 
defects  of  its  virtues.     With  a  few  exceptions,  we  miss  not  only 
historical  examples,  but  also  any  detailed  statement  of  actual 
fiscal  methods  in  America  and  any  comparison  with  the  institu- 
tions of  other  countries.    The  exceptions  are  to  be  found  chiefly 
in  Part  I.,  devoted  to  expenditure,  where  the  necessarily  brief 
discussion  of  theory  is  pieced  out  with  a  separate  chapter  on 
"some  facts.''    In  the  second  part,  however,  dealing  with  public 
revenue,  the  student  will,  for  instance,  search  in  vain  for  any 
description  of  actual  taxes,  whether  in  the  United  States  or 
abroad.    Professor  Adams  evidently  takes  for  granted  that  the 
reader  is  familiar  with  all  such  details,  and  he  prefers  to  dwell 
on  the  more  important  matters  of  principle.    It  may  be  queried, 
however,  whether  he  has  not  gone  a  little  too  far  in  this  respect, 
and  whether  the  book  would  not  be  still  more  valuable  to  the 
general  reader,  if  it  contained  the  essential  facts  as  well  as  the 
interpretations  to  be  put  upon  the  facts. 

In  considering  the  work  in  detail  the  reviewer  is  obliged  not 
only  to  call  attention  to  the  remarkable  brilliancy  and  general 
solidity  of  the  results,  but  also  to  attempt  the  less  grateful 
task  of  noting  the  shortcomings  that  are  inseparably  connected 
with  any  such  comprehensive  efi'ort. 

In  the  discussion  of  public  expenditures,  the  author  brings 
out  clearly  their  dependence  upon  the  stage  of  industrial  de- 
velopment.   He  lays  down  the  principle  that  a  profitable  in- 


RECENT  LITERATURE  IN  TAXATION  585 

vestment  for  a  state  is  one  which  results  in  raising  industry 
to  a  higher  level  of  efficiency.    From  this  point  of  view,  increased 
expenditure  is  not  necessarily  an  evil.    Attention  is  also  directed 
to  the  connection  between  public  expenditures,  on  the  one  hand 
and  political  conditions,  as  well  as  social  arganization,  on  the 
other.    Perhaps  the  only  point  lacking  in  this  analysis  is  a  dis- 
cussion of  the  influence  of  modern  democracy  upon  expenditures 
and  of  the  gradual  ascendency  of  the  preventive  over  the  re- 
pressive principle  in  modern  legislation.    A  suggestive  section 
compares  the  English  with  the  German  view  of  expenditures 
with  the  conclusion  that  the  English  writers  did  not  need  any 
definite  theory,  because  their  conception  of  the  state  implied  a 
hxed  limit  to  governmental  functions,  while  the  more  extreme 
German  economists  erred  in  setting  up  too  strong  a  presumption 
in  favor  of  the  state.    Professor  Adams's  position  lies  midway 
between  the  extremes  of  laissezfaire  and  socialism. 

In  Chapter  III.  an  attempt  is  made  to  classify  expenditures  in 
accordance  with  governmental  functions.     The  classification 
adopted  IS  that  of  ''protective,"  ''commercial"  and  "develoi>- 
mental"  functions,  including  under  the  latter  head  expendi- 
tures for  education,  recreation,  public  investigation,  mainte- 
nance of  equitable  conditions  for  the  prosecution  of  private  busi- 
ness and  development  of  the  physical  basis  of  the  state.    It  may 
be  conceded  that  the  particular  classification  adopted  is  not  of 
so  much  importance  as  the  method  pursued  in  dealing  with  the 
principles   themselves;   but    classification   may   emphasize   or 
obscure  principles,  and  the  scheme  employed  by  Professor  Adams 
may,  perhaps,  be  subject  to  criticism.    Why,  for  instance,  should 
the  outlay  for  reformatories  be  called  "protective  "  and  that  for 
schools   'developmental "?    Why  should  expenses  for  rendering 
justice  be  termed  "protective  "  and  those  for  maintaining  "equi- 
table conditions  "  for  private  business  "  developmental "?   Why, 
m  fact,  are  not  all  expenditures  "developmental"?    If  it  be 
claimed  that  protective  expenditures  look  at  the  bad  in  human 
nature,  and  developmental  expenses  at  the  good,  how  can  ex- 
penditures for  the  factory  acts,  for  railway  commissions  and  the 
like,  be  put  by  Professor  Adams  under  the  head  of  "develop- 
mental"?   We  may,  indeed,  desire  to  educate  the  good  impulses 
of  the  factory  owners  and  the  railway  managers;  but  precisely 
the  same  result  is  sought  to  be  attained  by  a  well-digested  poor- 
law  system,  or  a  well-arranged  penal  system,  or  a  good  judicial 
system,  all  of  which  are  classed  under  the  head  of  "protective" 


586 


ESSAYS  IN   TAXATION 


I 


Ilk 


'H 


functions.  And  why  the  building  of  a  railway  is  the  exercise 
of  a  "commerciar'  function,  while  the  building  of  a  canal  or 
dock  is  the  exercise  of  a  ''developmental"  function  is  still 
more  difficult  to  comprehend.  In  fact,  while  the  whole  of  this 
chapter  on  public  expenditure  is  remarkably  suggestive,  it 
confuses  things  that  ought  to  be  kept  separate,  and  it  separates 
things  that  ought  to  be  united.  Moreover,  almost  the  only 
question  of  principle  that  emerges  from  the  discussion  is  the 
tendency  of  given  exp(^nditures  to  grow  larger  or  smaller.  Even 
here  it  may  be  queried  whether  the  author  gives  due  weight 
to  facts  like  the  tendency  of  expenses  for  justice  to  increase- 
not,  as  he  says,  to  dimmish.  The  explanation  of  this  tendency 
is  not  that  people  grow  worse  as  they  become  civilized,  but  that 
the  complexity  of  modern  industry  is  continually  augmenting 
the  chances  of  collision  of  interests  and  thus  creating  new  classes 
of  crime.  In  this  detail  Professor  Adams  has  forgotten  the  gen- 
eral doctrine  which  he  elsewhere  so  eloquently  inculcates. 

In  the  book  devoted  to  the  budget  the  author  keeps  closer  to 
the  beaten  track.  Attention  may,  however,  be  directed  to  two 
interesting  novelties.  The  one  is  the  series  of  suggestions  looking 
to  a  reform  of  the  American  budgetary  system.  Professor 
Adams  believes  that  this  can  best  l>e  accomplished,  first,  by 
the  abolition  of  the  committee  on  appropriations  and  the  assign- 
ment of  its  duties  to  the  committee  on  ways  and  means,  together 
with  the  abandonment  on  the  part  of  all  other  committees  of 
their  right  to  introduce  appropriation  bills;  second,  by  the 
abolition  of  the  right  of  individual  initiative  of  money  bills, 
as  well  as  of  the  right  of  indiscriminate  amendment;  third,  by 
a  closer  connection  between  the  secretary  of  the  treasury  and 
this  new  budgetary  committee.  The  reasons  advanced  for  these 
changes,  all  of  which  are  within  the  realm  of  legislative  compe- 
tence, seem  to  be  in  many  respects  sound.  The  other  important 
discussion,  to  which  only  a  bare  allusion  can  l^e  made,  is  the 
treatment  of  the  theory  of  accruals  as  a  basis  of  public  account- 
ing. Here  not  only  is  the  plane  of  this  discussion,  as  elsewhere 
in  the  book,  an  elevated  one,  showing  on  the  part  of  the  author 
a  comprehensive  grasp  of  the  principles  at  issue,  but,  in  addition, 
we  have  the  satisfactory  feeling  of  being  in  touch  with  the  actual 
practice  and  the  details  of  real  life. 

Part  II.  deals  with  public  revenue.  A  section  treats  of  the 
subject  of  classification,  in  the  course  of  which  it  is  to  be  noted 
that  Professor  Adams  recognizes  the  existence  of  fees  and  special 


RECENT  LITERATURE  IN   TAXATION  587 

assessments,  and  declares  that  they  deserve  an  analysis  separate 
from  the  general  discussion  of  taxation.     But  after  this  frank 
confession— m  which  he  takes  issue  with  the  English  writers— it 
IS  a  distinct  disappointment  to  find  no  further  discussion  of 
these  topics.    The  omission  will  be  deplored,  not  only  by  those 
interested  m  the  correlation  between  legal  ideas  and  economic 
conditions,  but  also  by  those  who  believe  that  underlying  our 
American  practice  there  are  some  not  unimportant  questions 
of  pnnciple.    The  treatment  of  the  public  domain  and  of  public 
industry,  on  the  other  hand,  is  characterized  by  much  fresh  and 
keen  analysis.     Occasionally,  however,  Professor  Adams  gets 
mto  difficulties— as,  for  instance,  when  he  asserts  that  the  phrase 
quasi-private  price"  is  inapplicable  to  governmental  industry 
His  argument  is  that  private  prices,  as  "commonly"  competi- 
tive, always  seek  the  maximum  profit,  while  public  prices  are 
adjusted  to  the  idea  of  social  utility.    Nevertheless,  not  only 
does  he  speak,  a  little  later,  of  the  fiscal  monopolies  of  govern- 
ment which  seek  to  secure  only  profit,  but  he  also  calls  attention 
to  the  private  monopoly  charges,  adjusted  to  the  standard  of 
what  the  traffic  will  bear.    Between  the  extreme  of  competitive 
private  prices  and  social  public  prices  there  is  a  broad  field  to 
which  neither  term  is  applicable.     This  whole  analysis  is  sus- 
ceptible of  improvement.    Again,  while  the  discussion  of  the 
principle  of  charge  to  be  adopted  by  public  industries  is  excel- 
lent, It  may  be  questioned  whether  it  is  complete,  and  whether 
the  treatment  of  the  post-office,  of  the  telegraph  and  of  the  tele- 
phone, for  instance,  might  not  be  considerably  amplified  with 
profit.     Finally,  when  it  is  stated  that  the  industries  fit  for 
government  ownership  are  primarily  those  which  are  subject 
to  the  law  of  increasing  returns,  Professor  Adams  forgets  that 
this  law  can  no  longer  be  confined  to  industries  dealing  with 
transportation,  but  that  the  field  of  monopoly,  so  far  as  it  is  due 
to  the  existence  of  this  law,  is  constantly  growing  in  modern 
society.    A  more  careful  analysis  would  have  shown  a  far  greater 
complexity  in  the  relation  of  the  law  of  increasing  returns  to 
that  of  diminishing  returns  in  actual  industry. 

We  pass  over  the  final  book  on  public  credit,  where  the  author 
substantially  sums  up  the  well-known  conclusions  of  his  earlier 
work  on  PMic  Debts,  in  order  to  come  to  what  constitutes  at 
once  the  most  solid  and  the  most  valuable  part  of  the  treatise— 
the  book  on  taxation.  This  occupies  332  out  of  the  564  pages 
of  the  work.     It  is  here  especially  that  we  see  the  excellent 


II        M 


'* 


tll^ 


i 


j.  i  i 


i 


I' 


',   ^ 


Hi 


588 


ESSAYS  IN   TAXATION 


qualities  of  the  author  and  the  break  with  the  old  English  ways 
of  regarding  the  subject,  as  well  as  the  recognition  of  the  changes 
necessitated  by  the  newer  structure  of  industrial  society.    The 
discussions  of  the  essential  nature  of  taxation,  of  the  difference 
between  the  legal  and  the  economic  point  of  view,  of  the  duty 
to  pay  taxes  and  of  the  principle  of  tax  exemption,  are  at  once 
striking  and  admirable.    Not  less  noteworthy  are  the  abandon- 
ment of  the  benefit  theory  of  taxation,  with  all  that  that  implies, 
and  the  acceptance  of  the  progressive  principle.    The  analysis 
which  lead  up  to  the  relinquishment,  not  alone  of  the  doctrine  of 
proportion,  but  also  of  the  theory  of  the  general  property  tax, 
are  as  brilliant  as  they  are  profound.    In  one  respect,  however, 
Professor  Adams  seems  to  be  laboring  under  a  delusion.    In  his 
treatment  of  the  general  property  tax  he  several  times  repeats 
the  assertion  that  the  secret  of  its  success  in  the  middle  ages  lay 
in  the  fact  that  the  tax  was  assessed  not  on  individuals  but  on 
the  organizations  within  the  town,  and  that  there  was  thus  a  col- 
lective responsibility.     Professor  Adams  is  here  confusing  the 
town  as  a  taxing  unit  with  the  organization  within  the  town.    It 
is  true  that  in  England,  for  instance,  the  town  as  such  paid  its 
firma  hurgi;  but  this  was  in  no  wise  different  from  the  situation 
in  modern  times,  where  the  county  or  city  pays  a  lump  sum 
toward  state  expenses  as  its  share  of  the  property  tax,  or  where, 
as  in  France,  certain  cities  compound  for  the  octroi  duties. 
In  the  mediaeval  town,  as  in  the  modern  American  locality, 
this  aggregate  was  distributed  directly  among  the  individual 
citizens  according  to  their  property.    There  is  no  warrant  for 
the  assertion  that  there  was  collective  responsibility  of  any  kind 
of  a  degree  lower  than  the  local  community  itself.    Yet  upon  this 
mistaken   assumption   Professor   Adams   subsequently   builds 
up  a  part  of  his  scheme  of  reform.    The  only  exception  to  the 
above  statement  was  an  arrangement  in  a  part  of  Spain,  an 
acquaintance  with  the  failure  of  which  would  have  preserved 
the  author  from  this  curious  slip. 

The  classification  of  taxes  followed  by  Professor  Adams  is 
instructive.  He  divides  them  into  taxes  on  income,  on  property 
as  the  source  of  income,  and  on  business  as  a  means  of  securing 
an  income.  This  is  in  some  respects  convenient;  but  it  is  no  less 
open  to  objections  than  are  the  other  classifications  which  he 
discards.  Where,  for  instance,  shall  we  put  a  tax  assessed  on 
the  net  profits  of  land?  To  the  extent  that  it  is  imposed  on  land, 
it  is  a  tax  on  property;  to  the  extent  that  it  hits  the  income  of 


RECENT  LITERATURE  IN   TAXATION  589 

the  landowner  it  is  an  income  tax;  to  the  extent  that  it  reaches 
the  business  of  the  farmer,  it  is  a  business  tax-unless  indeed  we 
arbitrari  y  confine  the  term  business  to  non-agricultural  enter- 
prises.   Again  where  shall  we  put  a  poll  ta^?    Moreover,  in  the 
chapter  on  incidence.  Professor  Adams  recognizes  another  classi- 
fication  that  between  direct  and  indirect  taxes;  but  he  makes  no 
attempt  to  correlate  these  two  distinct  criteria  of  classification. 
The  chapter  on  the  shifting  and  results  of  taxation  is  clear  and 
seemingly  convincing.     But  it  may  be  queried  whether  the 
author  has  not  here  secured  clearness  and  simplicity  at  the  ex- 
pense of  accuracy.    The  conclusion  that  a  business  tax  is  "in- 
direct,     for  all  competitive  occupations  and  "partly  direct 
partly  mdirect,^'  for  monopolies  is  not  warranted.     It  implies 
that  every  tax  upon  a  competitive  industry  is  completely  shifted 
to  the  consumer,  while  this  is  far  from  being  the  case.   Moreover, 
the  author  s  classification  of  goods  into  those  produced  at  uni- 
form cost,  those  produced  at  expanding  cost,  and  those  produced 
under  conditions  of  monopoly  is  not  convincing.    He  forgets 
that  a  distinction  must  be  drawn  between  production  at  con- 
stant  cost  and  production  of  various  parts  of  the  supply  at 
different  costs.    A  competitive  industry  may  obey  the  law  of 
constant  returns  (that  is,  it  may  be  possible  to  produce  more 
of  the  article  at  a  proportionally  greater  outlay),  and  yet,  under 
dynamic  conditions  of  actual  industry,  the  various  parts  of 
the  supply  are  always  produced  at  different  costs,  some  pro- 
ducers being  more  eflScient  than  others-else  there  would  be 
no  profits     The  production  of  all  parts  of  the  supply  at  the  same 
cost    m  fact,  always  impHes  a  monopoly,  because  monopoly 
profits  alone  are  independent  of  any  marginal  producer.    The 
development  of  this  idea  would  take  us  too  far  afield;  but 
It  may  be  stated  that  Professor  Adams's  treatment  of  shifting 
IS  not  entirely  adequate.    It  must  be  noted  also  that  here  again 
only  a  few  broad  principles  are  laid  down,  and  that,  except  as 
regards  the  tax  on  land,  no  attempt  is  made  to  apply  the  prin- 
ciples to  the  separate  taxes.    Another  point,  moreover,  in  which 
Professor  Adams's  exposition  fails  to  command  assent  is  his  un- 
qualified opposition  to  productive  taxes.    Here  again  he  proves 
untrue  to  the  general  principle  of  historic  relativity  with  which 
tne  rest  of  the  work  is  permeated. 

Perhaps  the  most  interesting  chapters  in  the  book— certainly 
the  chapters  to  which  the  ordinary  reader  will  first  turn-are 
tnose  on    the  administrative  consideration  of  taxes  "  and  on  the 


IIH 


mil 


i" 


tt 


i     N  I 
ijlj  'f  I  # 


590 


£*S*Si4F^  IN   TAXATION 


reform  of  the  American  revenue  system.  Professor  Adams  is 
opposed  to  a  single  tax  of  any  kind,  as  well  as  to  a  direct  income 
tax.  As  to  the  property  tax,  he  advances  the  now  familiar  view 
that  it  should  be  confined  to  real  estate  and  that  it  should  be 
levied  only  by  the  local  divisions.  In  the  case  of  the  corporation 
tax,  he  points  out  that  net  receipts  constitute  the  proper  basis 
of  assessment,  and  that  the  taxation  of  interstate  commerce 
falls  naturally  to  the  federal  government.  This  would  leave 
intra-state  business,  as  well  as  inheritances,  to  be  taxed  by  the 
states,  while  excises  and  import  duties  would  fall  to  the  nation. 
The  municipal  revenues,  he  thinks,  should  be  supplemented  by 
a  tax  on  municipal  monopolies,  as  well  as  by  one  on  professional 
incomes,  to  be  assessed  on  guilds  that  are  to  be  created  for  the 
purpose. 

While  some  of  these  suggestions  are  in  harmony  with  the 
present  tendencies, — with  the  exception  of  the  rather  fanciful 
scheme  for  guilds,  which  as  we  have  seen,  rests  upon  a  misinter- 
pretation of  mediaeval  conditions, — the  chief  criticism  to  be 
urged  is  that  the  whole  plan  is  based  on  the  avowed  principle 
that  the  **  government  must  address  itself  to  the  industrial 
property,  the  industrial  process  or  the  industrial  organization, 
rather  than  to  the  individual."  From  the  point  of  view  of  ad- 
ministrative efficiency  or  of  increased  revenue  this  principle  is 
exceedingly  important;  but  it  is  hard  to  see  how  it  can  be  made 
to  square  with  the  principle  of  the  citizen's  ability  to  pay,  which 
the  author  accepts  as  the  fundamental  canon  of  taxation.  If 
the  property,  the  process  or  the  organization  can  be  regarded 
as  the  indirect  source  of  income,  well  and  good.  But  under 
Professor  Adams's  scheme,  no  such  correlation  is  worked  out. 
Corporation  taxes,  according  to  him,  are  to  be  confined  to  busi- 
ness essentially  public  in  character;  and  even  here  it  is  not 
shown  how  the  bondholders  can  be  made  to  pay  taxes.  Or- 
dinary business  taxes  are  to  be  Hmited  to  a  very  few  occupations, 
assessed  by  the  federal  government;  and  here  again,  according  to 
his  theory,  the  taxes  will  be  shifted  to  the  consumer.  Thus  the 
owners  of  some  of  the  chief  sources  of  modem  wealth  would 
virtually  escape  taxation;  and  the  criticism  which  Professor 
Adams  urges  against  schedule  D  of  the  English  income  tax  may 
be  turned  against  himself.  It  is  hopeless  to  expect  the  American 
farmer  to  consent  to  an  abolition  of  the  general  property  tax, 
even  in  those  states  where  the  conditions  are  ripe  for  a  change; 
just  as  it  is  hopeless  to  expect  the  American  laborer  to  rest 


j^|.| 


RECENT  LITERATURE  IN  TAXATION 


591 


content  under  an  increase  of  the  taxes  he  pays  in  the  shape 
of  federal  excises,  unless  we  show  both  the  one  and  the  other 
that  our  proposed  scheme  of  reform  is  calculated,  either  di- 
rectly or  indirectly,  to  reach  with  rough  but  substantial  accu- 
racy the  real  earnings  of  those  classes  who  are  to-day  fast  getting 
into  their  hands  the  increment  of  social  wealth.  The  earlier 
chapters  of  Professor  Adams's  book  deal  with  problems  of  jus- 
tice; the  later  chapters  with  questions  of  administrative  ex- 
pediency; and  the  conclusions  reached  from  the  first  point  of 
view  do  not  always  harmonize  with  those  reached  from  the 
second. 

We  have  not  hesitated  to  call  attention  to  the  few  points  in 
which  the  treatise  seems  to  invite  criticism;  but  all  these  criti- 
cisms pale  into  insignificance  when  compared  with  the  praise 
that  must  be  accorded  to  the  solid  merits  of  the  book.    It  is 
perhaps  no  exaggeration  to  say  that  Professor  Adams  is  at  the 
head  of  those  American  scholars  who  have  grasped  the  essential 
spirit  of  modern  industrial  life;  and  it  is  likewise  no  exaggeration 
to  claim  for  this  volume  the  distinction  of  being  one  of  the  most 
original,  the  most  suggestive  and  the  most  brilliant  productions 
that  have  made  their  appearance  in  recent  decades.     At  all 
events,  it  is  safe  to  assert  that,  in  America  at  least,  the  publica- 
tion of  this  treatise  marks  an  epoch  in  the  discussion  of  fiscal 
problems.    We  may  congratulate  ourselves  that  we  have  in  this 
country  so  masterly  a  representative  of  the  newer  and  saner 
views  as  is  the  author  of  this  remarkable  work. 

Shortly  after  the  publication  of  Professor  Adams's  book, 
there  appeared  a  work  by  one  of  the  most  distinguished  ex- 
ponents of  practical  tax-reform.  In  any  catalogue  of  recent 
literature  a  prominent  place  must  be  awarded  to  a  work  that 
is  at  once  new  and  old— the  stately  volume  of  Mr.  Wells,  on 
The  Theory  and  Practice  of  Taxation,^  The  phrase  ''at  once 
new  and  old"  is  used  advisedly;  for  the  book  is  new,  in  that 
it  is  the  result  of  the  studies  and  experiences  of  a  long  and 
useful  life  devoted  to  public  interests,  and  in  that  it  deals  with 
a  problem  which  is  perennially  fresh;  and  yet  the  work  is  old, 
because  it  restates  doctrines  that  have  been  associated  with 
the  name  of  the  author  for  over  a  quarter  of  a  century,  and 
because  Mr.  Wells  had  been  so  deeply  immersed  in  certain 

^  D.  A.  Wells,  The  Theory  and  Practice  of  Taxation.    New  York,  1900. 


f 


592 


ESSAYS  IN  TAXATION 


i 


i^  '1 


I  i 


parts  of  the  problem  that  he  has  been  unable  to  turn  his  atten- 
tion to  some  of  its  newer  and  more  important  phases. 

To  the  merits  of  the  book  it  is  scarcely  necessary  to  call 
attention.  Mr.  Wells  had  scarcely  an  equal  in  this  country 
in  the  ability  to  marshal  facts  from  out-of-the-way  and  recon- 
dite sources  in  an  attractive  manner,  and  to  present  his  results 
in  a  style  so  simple  and  so  clear  that  they  are  sure  of  attracting 
the  notice  of  the  public;  while  his  long  experience  in  dealing 
with  the  difficulties  of  fiscal  administration  afforded  him  a 
unique  opportunity  for  approaching  the  problems  from  a  prac- 
tical standpoint.  Moreover,  his  intense  Americanism,  and  his 
recognition  of  the  fact  that  in  a  democracy  like  ours  the  legal 
and  constitutional  aspects  of  economic  problems  are  of  supreme 
importance,  always  made  him  careful  to  call  attention  to  the 
adjudications  of  the  courts  and  to  consider  the  whole  problem 
in  the  light  of  possible  legal  changes. 

All  these  characteristics  of  his  work  are  well  illustrated  in 
the  present  volume.  Mr.  Wells  has  ransacked  the  records  of 
fiscal  practice,  so  far  as  they  can  be  found  in  the  literature  of 
English-speaking  countries;  he  gives  fresh  and  attractive  ac- 
counts of  the  system,  or  lack  of  system,  as  it  exists  or  used 
to  exist  in  countries  so  unlike  as  Mexico,  Egypt  and  China; 
he  draws  upon  his  own  store  of  rich  experience  in  connection 
with  the  system  of  internal  revenue  in  the  United  States;  and, 
finally,  his  quotations  from  the  leading  tax  cases  in  the  state 
and  federal  courts  are  so  full,  and  in  some  respects  so  well 
selected,  that  the  book  possesses  a  value  for  the  lawyer  only 
second  to  that  which  it  has  for  the  economist. 

Nevertheless,  with  all  its  good  points,  the  work  is  in  some 
respects  distinctly  disappointing.  It  is  not,  mdeed,  written 
primarily  for  the  student,  and,  therefore,  we  need  not  consider  it 
as  a  shortcoming  that  the  author's  acquaintance  with  scientific 
literature  is  limited  to  works  in  English.  But  Mr.  Wells,  as 
is  evident  from  the  title,  proposed  to  treat  the  subject  from 
the  point  of  view  of  theory,  as  well  as  of  practice.  Now,  it  is 
well  known  that  Mr.  Wells  was  not  especially  strong  in  theory; 
and,  whatever  can  be  said  of  the  work,  no  one  can  accuse  it  of 
over-precision  in  systematic  treatment.  A  cursory  examination 
of  the  table  of  contents  will  suffice  to  convince  anyone  of  this. 
Mr.  Wells  possessed,  indeed,  so  much  common  sense,  such  an 
instinct  for  what  was  practicable  and  expedient,  that  his  con- 
clusions are  almost  always  better  than  his  theory.     It  might 


RECENT  LITERATURE  IN  TAXATION  593 

almost  be  said  of  him  that  he  was  often  correct  in  spite  of  his 
theory,  and  not  because  of  it. 

His  opinions  are,  as  has  been  stated,  precisely  the  same  as 
those  that  were  advanced  by  him  thirty  years  ago;  for  the  waves 
of  recent  economic  discussion  seem  to  have  dashed  unavailinglv 
agamst  his  adamantine  convictions.    Thus,  we  still  find  it  laid 
down  as  a  fundamental  doctrine  that  taxation  for  any  other 
purpose  than  revenue  is  confiscation.    His  well-founded  fear  of 
the  use  of  the  taxing  power  for  promoting  private,  rather  than 
pubhc,  purposes  drove  him  to  the  length  of  refusing  to  coun- 
tenance  the  use  of  taxation  for  any  public  purpose  other  than 
revenue.    It  is  sigmficant,  however,  that  we  find  in  the  entire 
book  no  allusion  to  the  theory  of  high  Hcense  or  to  the  recent 
practice  of  American  commonwealths  in  this  respect.     Mr 
Wells  IS  such  an  uncompromising  partisan  of  free  trade  that 
he  cannot  afford  to  accept  a  principle  which  would  even  in- 
directly justify  the  imposition  of  a  protective  duty 

Again   we  find  among  the  maxims  of  taxation  our  familiar 
mTw  11^  '^^l^'''''^y  «^  protection  theory.     It  is  true  that 
Mr.  Wells  writes  rather  plaintively:  -This  assumption,  it  is 
beheved,  has  been  endorsed  and  accepted  by  every  writer  of 
repute  on  economic  subjects  who  has  discussed  taxation,  from 
the  time  of  Montesquieu  down  to  a  very  recent  period."    In 
the  few  lines  that  he  devotes  to  the  "very  recent''  doctrine  he 
complains  that  the  antagonism  to  the  old  theory  is  wholly  due 
to  an  inadequate  comprehension  of  the  subject;  but,  unfortu- 
nately, he  does  not  aid  us  to  a  more  adequate  comprehension. 
Of  a  piece  with  this  is  the  repetition  of  his  famihar  opposition 
to  the  theory  of  progressive  taxation.    He  is  somewhat  hard- 
pressed  however,  to  find  facts  to  justify  his  gloomy  predictions; 
and  although  he  does  refer  in  passing  to  the  results  in  the  Swiss 
cantons,   which   "are  reported  to  have  already  verified  the 
prophecies  of  the  European  economists,"  he  does  not  attempt 
to  explain  how  it  is  that  the  movement  is  commending  itself 
more  and  more,  not  only  to  these  Swiss  cantons  themselves, 
out  to  the  European  economists  as  well. 

In  the  discussion  of  the  distinction  between  direct  and  in- 
direct taxes  we  meet  the  venerable  error  that  direct  taxes 
are  compulsory  and  indirect  taxes  are  voluntary— a  statement 
the  inaccuracy  of  which  has  been  so  often  and  so  effectually 
exposed  as  to  need  no  further  comment  here.  Although  Mr 
Wells  tells  us  (on  page  356)  that  the  British  tax  system  ha^ 


594 


ESSAYS  IN  TAXATION 


m 


it  Hi 


/  / 


f 

$' 


been  immensely  improved  in  the  past  half  century,  through  an 
extensive  substitution  of  direct  for  indirect  taxes,  his  opposi- 
tion to  any  income  tax  is  so  strong  that  on  page  516  he  for- 
gets what  he  has  said  before  and  approves  Mr.  Gladstone's 
statement  as  to  the  odious  character  of  the  impost  which 
forms  the  very  basis  of  the  EngUsh  fiscal  system  and  which 
alone  rendered  possible  the  change  from  indirect  to  direct  taxa- 
tion. 

The  last  three  chapters  of  the  volume  are  devoted  to  a  re- 
statement of  the  law  of  incidence  and  to  the  best  methods  of 
framing  a  system  which  will  conform  to  this  theory.  Our  old 
friend,  the  equal-diffusion  theory,  is  again  paraded  in  new  and 
shining  harness.  Tucked  away,  however,  on  page  597  is  a 
little  sentence,  the  import  of  which  must  have  escaped  the 
notice  of  even  the  author  himself.  He  says:  "It  is  not,  how- 
ever, contended  that  unequal  taxation  on  competitors  of  the 
same  class,  persons  or  things,  diffuses  itself."  A  statesman 
like  Mr.  Wells,  who  has  been  dealing  with  the  practical  details 
of  actual  tax  systems  in  each  of  the  states  and  territories  of 
this  country,  ought  to  have  seen  that,  when  to  the  inherent 
difficulties  of  making  taxes  under  any  one  government  precisely 
equal  are  added  the  complications  of  numerous  competing 
jurisdictions,  a  theory  based  upon  equal  taxation  has  a  very 
remote  relation  to  actual  problems.  Even  on  the  supposition 
of  equal  taxation,  however,  the  strength  of  Mr.  Wells's  position 
can  be  gauged  by  his  answer  to  the  question  he  proposes  on 
page  586:  ''Would  an  income  tax  on  a  person  retired  from 
business  be  diffused?  "  The  reply  is:  "  Yes,  if  the  tax  is  uniform 
on  all  persons  and  on  all  amounts"  For  this  statement  the 
very  convincing  reason  is  adduced:  "Would  anyone  pay  the 
same  price  for  a  railroad  bond  which  is  subject  to  an  income 
tax,  as  he  would  pay  for  it  if  it  was  free  from  taxes?  "  It  is 
such  essential  incapacity  to  grasp  a  theoretical  proposition 
that  has  made  Mr.  Wells's  reputation  among  scientific  thinkers 
rest  on  other  grounds  than  the  ability  to  draw  logical  conclu- 
sions from  definite  premises. 

And  yet,  with  all  these  evident  shortcomings,  Mr.  Wells's 
practical  inferences  as  to  reform  in  state  and  local  taxation  are 
in  harmony,  so  far  as  they  go,  with  those  of  modem  investi- 
gators. We  say,  "so  far  as  they  go,"  because,  for  aught  that  is 
found  in  the  book,  there  is  no  such  thing  as  a  corporation-tax 
problem,  or  even  an  inheritance-tax  problem,  not  to  speak  of 


I 


RECENT  LITERATURE  IN  TAXATION  595 

many  of  the  weighty  problems  of  interstate  double  taxation. 
In  respect  to  these,  Mr.  Wells  has  slept  the  sleep  of  Rip  Van 
Winkle.  To  the  extent,  however,  that  a  large  part  of  the 
problem  is  now  precisely  the  same  as  it  was  thirty  years  ago 
the  new  book  of  Mr.  Wells  is  both  welcome  and  timely.  Let 
us  read  It  for  the  good  that  is  in  it,  and  not  complain  because 
It  IS  not  Ideal.  It  is  given  to  few  writers  to  be  strong  in  both 
theory  and  practice.  Let  us  be  thankful  that  in  Mr.  WeUs  we 
have  a  man  who  is  not,  like  so  many  would-be  authorities 
weak  m  both.  ' 


Note  to  9th  ed     The  above  chapter  deals,  as  stated  on  p.  543,  only  with 

the  hterature  of  pubhc  finance  have  been  made.    We  may  mention  in  Ger- 
man: M.  von  Meckel,  Lehrbuch  der  Finanzwissenschaft,   1907-1911-  W 
Lotz,  Fmanzudssenskaft,  Tubingen,   1917;  the  Hungarian,  Bela  Fsldes* 

der  Schweiz  4  vols.  Bern,  1916,  and  the  Scandinavian,  E.  Lindahl,  Die 
GerecMigkeit  der  Best^uerung,  Lund,  1919;  in  French,  the  7th  ed.  of  Leroy- 
«eaulieu,  Trailede  la  science  des  finances,  1906;  the  5th  ed.  of  J^ze,  Cours 
de  science  des  finances,  1912,  as  weU  as  four  volumes  (1915-1920)  bv 
the  same  author  on  the  War  Finances  of  England,  France  and  Italy  and 
the  capital  levy;  L.  Suret,  Theorie  de  Vimpdt  progressif,  1910;  and  A  Mi- 
chekon,  Leprobleme  dcsfiminces  publiqiies  apres  la  guerre,  Lausanne,  1919- 

Qi  1    if'o?^  f  ^;?^  ^'  ?^^^^^«»'  Istituzioni  di  scienza  della  finanze,  Turin 
1911;  the  2d  ed.  of  Nitti,  Scienza  della  finanze,  Rome,  1905;  Lorini  Sde^ 

To^rZX^^  !f  f  AV  ^^T'^'  Corsodi  scienza  deli:.'ZZ, 
T  iJZ;  1  Q9i'  ^  ifi^  ^-  ""i  ^-  ^^^'^'  ^'^^^^  ^^^  '^''^  delle  finanz^, 
Livomo,  1921;  R.  Murray,  Scienza  pura  della  finanza,  Florence.  1914-  E 

Ardumo,  Elemenh  di  scienza dellefinanze  e  diritto  finanziario,  Brescia  1914* 

enzo,  1918,  and  Sai^atore  Majorano,  LHmposta  progressiva,  Rome,  1920-  in 
1?14  F  R  *  ^?^b;"^  Alerany,  Teoria  economica  de  las  impuestos,  Barcelona, 
iyi4,  K  Bemis,  La  hacienda  espanola,  Barcelona  (1917);  R.  M.  Maearifios 
Contnbucidn  immobUiaria,   Montevideo,    1914;    and    E     JaramUlo    la 
refomrn  tnbutaria  en  Colombia,  n.  p.,  1918  Jaramillo,   La 

mo  ?7Tq  ^n^i""  ^^"'^  ^  P  ^  ^'  ^i^n^iz^ :  W.  Kemiedy,  English  Taxation, 
fl.^f'r.       ^^'""^  ''''  ^""^'"^  ^"'^  Opinion,  1913;  R.  Jones,  The  Nature 

Sto/m9  T^f  '-^  "^rfrV  '''''  ''  ^-  «°^^^^'   Taxation  in  the  nZ 

1  'n.,    y^  '''  ^^amp,  British  Incomes  and  Property,    1916   2d  ed     1921 
and  TAeJundam^^  Principles  of  Ta^li^  in  the  Light  of  Modem  D ito^ 
mmt   1921,  H.  Higgs,  Tte  Ftrumcial  Syste7n  of  the  United  Kingdom,  1914 
and  ^  Pnmer  ofNaliomU  Fimnce,  1919;  and  Sidney  Webb,  How  to  mv  im 
the  War,  1916.    In  the  United  States  we  have  to  note  the  4th  ^  rf  ^!ws 

Taxation  m  Canada  and  the  V.  S.,  1915;  and  The  Taxation  of  Excess 
^or^'y  in  Great  Britain,  1920;  J.  H.  Hollander,  War  Borr^Tg,  itl^ 
M.  H.  Hunter,  Outlines  of  PuMic  Finance,  1921. 


CHAPTER  XIX 

AMEKICAN   BEPORTS   ON   TAXATION^ 

The  history  of  official  attempts  to  reform  the  system  of 
state  and  local  taxation  in  the  United  States  may  be  divided 
into  several  periods:  the  early  period  to  1870;  the  generation 
from  1870  to  the  close  of  the  century;  the  decade  from  1900 
to  1910,  and  the  final  period  from  1910  to  the  present. 

I.  The  Preliminary  Period 

During  the  earlier  period  taxation  was  light  and  the  tax 
methods  were  not  yet  out  of  touch  with  industrial  conditions. 
The  first  report  to  deal  with  the  subject  was  the  the  New  York 
report  of  1832.^  This  was  concerned  chiefly  with  the  question 
of  reimposing  a  direct  tax  the  abolition  of  which  in  1826  had 
been  made  possible  by  the  success  of  the  Erie  Canal.  The 
committee,  deciding  that  public  works  were  not  a  legitimate 
source  of  revenue,  recommended  the  reimposition  of  the  direct 
tax.  A  few  years  later  another  committee  discussed  the  problem 
afresh  and  rendered  a  report  ^  which  came  to  the  opposite  con- 
clusion. In  the  next  decade  a  Connecticut  report  ^  took  up 
the  question  of  method  and  recommended  the  taxation  of  all 

*  In  the  present  (ninth)  edition  this  chapter  and  its  successors  have  been 
much  abbreviated,  although  the  entries  have  been  made  more  complete. 
Since  this  chapter  originally  appeared,  a  general  study,  expository  rather 
than  critical,  has  been  made  of  this  topic.  Cf.  J.  W.  Chapman,  Jr.,  State 
Tax  Commissions  in  the  United  States  in  the  Johns  Hopkins  University 
Studies,  vol.  xv  (1897). 

^  Report  of  the  Committee  on  Finance  on  so  much  of  the  Governor* s  Message 
as  relates  to  the  Finances  of  the  State  and  the  Report  of  the  Comptroller  relative 
to  Loans.    In  Senate  [of  New  York],  February  28th,  1832,  20  pp. 

'  In  Assembly  (of  New  York) .  Report  of  the  Committee  of  Ways  and  Means 
on  the  United  States  Deposit  Fund  and  on  the  Recommendations  of  the  Comp- 
troller to  levy  a  Direct  Tax,  March  12,  1836,  37  pp.  This  was  reprinted  as 
Report  upon  the  Finances  and  Internal  Improvements  of  the  State  of  New 
York,  1838,  and  issued  in  New  York,  Boston,  and  other  cities. 

*  Report  of  the  Committee  appointed  by  the  General  Assembly  {of  Connecti- 
cut) to  inquire  into  the  Subject  of  Taxation,  New  Haven,  1844. 

596 


AMERICAN  REPORTS  ON  TAXATION  597 

therS'L?"'^"'  '■^*'  '"  'r  °^  *^  'y'^"^  °f  classification 
then  in  force.  Seven  years  later  this  recommendation  was 
sucoBssfu lly  repeated  by  another  Connecticut  commiS 

Ihe  only  other  report  of  the  decade  was  that  of  the  Charles- 
ton commLssion.^  South  Carolina,  like  Connecticut,  waL  Si 
under  the  system  of  classification,  property  being  tl^  at 
different  rates  according  as  it  consisted  of  real  estate,  stoTk  S 
trade,  securities,  or  earnmgs  from  professions.    The  report  is  a 

nf  Jhl  ^1     f^^"'^''°^»ent  but  interesting  passage  forming  one 
of  the  earhest  defenses  of  the  faculty  theory: 

"Depending  on  the  principle  that  the  degree  of  protection  tnV^n  f.,. 
property  ,s  the  measure  of  taxation,  the  presint  system  S?^  T'w^ 
of  the  unqualified  obligation  of  the  citizen  to  the  state  a?d  'Stitut^t 
reckoning  f  benefits,  a  balancing  of  accounts  between  them  d^t  uctive 
of  the  sentiment  of  a  high,  pure,  and  devoted  patriotism.  The  strene^h 
and  beauty  and  gory  of  a  people,  the  life  and  fortunes  of  the  citLen  abfde 

au^Z  tjf"""  •"  *^';  "'^ V"'* '"  t*""  'i^Sree  that  both  may  be  rt 
quired  for  the  common  welfare,  should  they  be  cheerfuUy  accorded  " 

In  the  meantime  the  rapid  advance  in  wealth  made  the  de- 
lects ot  the  existing  system  more  apparent.     The  New  York 
report  of  1863  '  which  is  noteworthy  also  for  the  collection  of 
comparative  material,  was  the  first  to  call   attention  to  the 
mass  of  wealth  skulking  and  hiding  from  the  tax-gatherers  " 
The  committee  could  not  see  their  way,  however,  to  recommend 
the  listmg  system,  but  had  much  to  say  about  exemptions  and 
tne  taxation  of  mortgages.    They  compared  the  New  York 
system  to  the  English  "composed  of  direct  income  and  excise 
taxation,    which  they  found  too  intricate  for  a  young  country 
rwo  years  later  a  Philadelphia  report  approved  the  method' 
followed  m  Pennsylvania,  of  subjecting  securities  to  a  lower 
rate  of  taxation."    Shortly  thereafter  two  state  commissions 
ot  the  same  commonwealth  again  discussed  the  problem,  ad- 

'  Report  of  the  Joint  Standing  Committee  on  Finance  upon  the  Subiecl  of 
Taxation,  wilh  a  Bill  in  Form,  Hartford,  1851,  59  pp.  "' 

'  The  DisaMlit^s  of  Charleston  for  compUle  equal  Taxation,  and  the  In. 
Jtuences  of  State  Taxation  on  our  Prosperity.  A  Report  of  the  Committee  on 
Ways  and  Means  made  to  the  CUy  CouncU,  Charleston,  1857  60  pp 

r^„f!^  T  f'  w""  ^T*™''"'  ^™«  >>y  ihe  Joint  Select  Committee  ap. 
pointed  by  the  Legislature  of  186i.    Albany,  1863,  267  pp 

rl.,  St^i ,"{  "^  C"""™'««<»»«f«  appointed  under  an  Ordinance  of  the 
im  y'^'^^^P''"'  '"  ''"^  ^  ^«™  '■«''"»««'  to  Taxation,  PhUadelphia, 


*■! 


598 


ESSAYS  IN  TAXATION 


i^tii« 


I  « 


dressing  themselves,  however,  to  minor  points,^  as  did  a  New 
Jersey  report  of  1868  which  seemed  to  be  helpless  in  the  face 
of  poor  administrative  methods.^  In  the  same  year  another 
Connecticut  commission  again  recommended,  with  similar  lack 
of  success,  that  a  state  tax  commission  be  appointed.^ 

II.  The  Penod  1870-1900 

The  real  starting  point  of  the  movement  for  reform  is  to  be 
found  in  the  well-known  double  report  ^  of  the  New  York 
commission  in  1871-72,  written  chiefly  by  David  A.  Wells. 
Not  only  did  it  contain  a  great  mass  of  information  as  to  actual 
facts,  but  it  gave  an  account  of  the  prevalent  legal  conditions, 
which  is  valuable  even  to-day.  Above  all,  it  attempted  to 
lay  down  guiding  principles.  The  practical  question  to  which 
the  report  primarily  addressed  itself  was  the  taxation  of 
personal  property.  It  took  the  position  that  in  order  to  tax 
equitably,  it  is  not  necessary  to  tax  everything;  and  it  proposed 
to  replace  the  existing  tax  on  personalty  by  a  taxation  of 
house  rent  on  the  occupier.  Significant  also  was  the  recommen- 
dation of  a  permanent  central  authority  to  supervise  local 
assessors.  Important  as  was  its  treatment  of  practical  prob- 
lems, the  value  of  the  report  is  somewhat  impaired  by  two 
defects  in  theory — the  espousal  of  the  benefit  theory  in  taxation 
and  the  defence  of  the  diffusion  doctrine  of  incidence. 

The  second  important  report  of  this  decade  is  that  of  Massa- 
chusetts ^  which  took  issue  with  the  New  York  commission 
on  these  two  points.  The  theory  of  protection  is  shown  to 
be  inadequate  and  untrue;  and  the  doctrine  of  faculty  is  now 
vigorously  defended.  The  general  diffusion  theory  is  denied 
and  some  strong  arguments  are  presented  in  opposition.  As 
regards  the  practical   question,   however,   the   Massachusetts 

1  Bsport  of  the  Auditor  General,  Secretary  of  the  Commonwealth  and  State 
Treasurer,  on  the  Tax  Laws  of  the  State  {of  Pennsylvania),  Harrisburg,  1867. 
— Report  of  the  State  Tax  Commission,  1868,  in  Pa.  Legislative  Documents  of 
1868,  pp.  345-433. 

2  Report  of  Honorable  Charles  S.  Ogden  {and  others)  to  the  Legislature  of 
New  Jersey  {on  Taxation),  Trenton,  1868. 

'  Report  of  the  Special  Commission  on  Taxation,  New  Haven,  1868. 

*  Report  of  the  Commissioners  to  revise  the  Laws  for  the  Assessment  and 
Collection  of  Taxes  in  the  State  of  New  York,  New  York,  1871,  154  pp.; 
ditto,  Second  Report,  Albany,  1872,  102  pp. 

'  Report  of  the  Commissioners  appointed  to  inquire  into  the  Expediency  of 
revising  and  amending  the  Laws  relating  to  Taxation  and  Exemption  there- 
from, Boston,   1875,   177  pp. 


AMERICAN  REPORTS  ON  TAXATION  599 

commission  sought  to  uphold  the  existing  system.  The  New 
York  commission's  suggestion  of  a  partial  substitute  for  the 
personal  property  tax  in  the  shape  of  a  tax  on  rentals  was 
good  so  far  as  it  went,  but  not  sufficient.  The  Massachusetts 
report  discerned  this  shortcoming;  but  because  the  commission 
did  not  see  their  way  to  expand  the  suggestion  or  to  propose 
an  additional  substitute,  they  threw  over  the  whole  plan  and 
mamtamed  the  adequacy  of  the  existing  svstem.  On  the 
other  hand  the  New  Hampshire  report  of  1876,^  followed  in 
the  main  lines  of  the  New  York  report. 

The  next  decade  brought  with  it  new  problems.    In  addition 
to  the  taxation  of  mortgages  and  of  personal  property  in  general 
the  public  was  now  beginning  to  consider  the  relations  of  local 
to  state  revenue,  the  growing  intricacies  of  interstate  taxation 
and  the  corporation  tax.    The  New  Jersey  report  of  1880  ^  and 
the  Connecticut  report  of  1881  '  agreed  in  recommending  both 
the  hstmg  system  and  a  system  of  state  control.    The  New 
York  commission  of  the  same  year  '  marked  the  beginning  of  a 
new  era  by  attacking  the  task  confided  to  them  of  "providing 
revenues  for  the  state  government  by  a  special  tax  on  corpora- 
tions and  particular  classes  of  business,  and  thereby  to  limit 
the  general  taxes  to  be  imposed  in  the  local  communities  ex- 
clusively for  the  support  of  local  governments."     The  other 
states  were  not  yet  prepared  for  such  a  step.    The  New  Jersey 
report  of   1883^   contented   itself  with  recommending  some 
improvements  in  the  taxation  of  railroads,  and  the  West  Vir- 
ginia commission  of  1884 «  seemed  not  to  know  what  to  do 
with  intangible  property.    The  Connecticut  commission  issued 

»  Report  of  the  Legislature  of  New  Hampshire  of  Hon.  George  Y  Sawyer 
Chairman  of  the  Board  of  Commissioners  to  revise,  codify  and  amend  the  Tax 
Laws  of  the  State  and  for  the  Establishment  of  an  Equal  System  of  Taxation 
Concord,    1876,  52  pp.  ' 

2  Report  of  the  Special  Tax  Commission  of  the  State  of  New  Jersey   New 
Brunswick,   1880,  27  pp.  ^' 

J  Report  of  the  Special  Commission  to  inquire  into  the  Conditions  and 
Workings  of  the  Tax  Laws,  New  Haven,  1881. 

\Decisiom,  Opinions  and  Statistics  compiled  by  the  Tax  Commission  with 
their  Report,  Presented  to  the  Legislative  Joint  Tax  Committee  of  New  York 
Albany,  1881.  ' 

6  Report  of  the  Special  Committee  of  the  House  of  Assembly  as  to  the  Taxa- 
tion of  Railroads  and  other  Corporations  in  this  State,  Trenton,  1883,  20  pp 
«  West  Virginia  Tax  Commission,  Preliminary  Report,  Wheeling    1884* 

^J:Y}  pp-  "^^^  PP''  ^^®^  Virginia  Tax  Commission.    For  its  Final  'Report 
(1884),  26  pp.  ^     ' 


600 


ESSAYS  IN  TAXATION 


4 


two  rather  inconclusive  reports.  In  a  preliminary  report' 
they  recommend  the  apportionment  of  taxes  according  to 
population  instead  of  property.  As  this  seemed  to  be  too 
radical,  however,  they  fell  back,  in  their  final  report,  ^  upon  the 
listing  system,  although  they  coupled  this  with  recommenda- 
tions for  a  state  tax  conunissioner  and  for  the  abolition  of  the 
tax  on  intangible  personalty.  The  last  recommendation  led 
to  the  introduction  two  years  later  of  the  low-rate  fiat  tax  on 
intangibles. 

The  Illinois  report  ^  of  1886,  although  slight  in  bulk,  is  note- 
worthy for  its  advocacy  of  a  divorce  of  state  from  local  rev- 
enues. The  commission  suggested  that  the  property  tax  be  con- 
fined to  the  localities,  and  that  the  state  revenues  be  secured 
from  corporation  taxes.  The  plan  was  not  entirely  new,  for  a 
New  York  commission  had  already  advanced  the  idea  a  few  years 
before;  ^  but  we  now  find  it  worked  out  for  the  first  time  in  a 
state  of  the  Middle  West.  In  the  same  year  appeared  the 
report  of  the  Baltimore  commission  ^  which  proved  to  be  the 
basis  for  the  state  report  ^  issued  two  years  later.  Each  com- 
mission had  the  good  fortune  to  numl^er  among  its  members 
a  student  who  had  given  considerable  attention  to  the  subject. 
Professor  R.  T.  Ely  not  only  succeeded  in  inducing  the  com- 
missions to  accept  some  noteworthy  conclusions,  but  added  to 
the  city  report  some  independent  suggestions  and  to  the  state 
document  a  supplementary  report.  Advocating  a  total  ex- 
emption of  personal  property,  he  proposed  the  exemption  of 
real  estate  from  state  taxation;  taxes  on  corporations,  and  an 
income  tax  as  the  chief  sources  of  state  revenue;  a  tax  on 
real  property  and  on  the  rental  value  of  business  premises  as 
the  chief  sources  of  local  revenue.  The  most  significant  parts 
of  the  report  are  the  detailed  criticism  of  the  general  property 
tax,  and  the  proposal  to  utilize  for  sources  of  municipal  rev- 
enue what  Professor   Ely  termed   the  natural  monopolies.^ 

*  Preliminary  Report  of  the  Special  Commission  on  Taxation,  New  Haven 
1886. 

*  Report  of  the  Special  Commission  on  the  Subject  of  Taxation,  New  Haven 
1887,  116  pp. 

'  Report  of  the  Revenue  Com?nissionj  Springfield,  1886,  70  pp 

*Cf.  supra,  p.  368. 

'  Report  of  the  Tax  Commission  of  Baltimore,  Baltimore,  1886,  64  +xlvi  pp. 

*  Report  of  the  Maryland  Tax  Commission  to  the  General  Assembly  Balti- 
more, 1888,  200  -f-  cii  pp. 

'  Professor  Ely's  supplementary  report  was  subsequently  reprinted  with 


AMERICAN  REPORTS  ON  TAXATION  601 

Appended  to  the  report  is  an  interesting  historical  sketch  of 
taxation  m  Maryland. 

Partly  as  a  result  of  the  Maryland  report,  but  chiefly  as  an 
outgrowth  of  the  discontent  now  manifested  in  other  sections 
ot  the  country  as  well,  tax  commissions  multiplied.  In  1890 
the  Maine  commission  issued  its  report '  which  contains  a 
digest  of  the  legal  provisions  then  in  force  in  the  most  im- 
portant states  on  the  listing  system,  equahzation,  the  poll  tax 
the  dog  tax,  and  the  taxation  of  railways,  insurance  companies 
and  savmgs  banks.  pctme^ 

The  commission  concluded  that  the  failure  to  reach  person- 
alty might  be  overcome  by  requiring  sworn  detailed  inven- 

f  W ';i.         ""f  T  ""^  ^^?  ^'^^^'  "^^y  ^^  ^^"g^d  by  the  statement 
that  the  smgle  tax  on  land  values  is  the  system  which  most 

European  countries  have  adopted.  When  the  present  writer 
Tw  .1,  ^  !,  '^'^'^f^']  f«r  an  explanation,  the  answer  was 
that  they  had  learned  this  fact  from  one  of  his  own  articles! 
Inirther,  m  discussmg  the  income  tax  (which  they  reject) 
they  repeat  the  statement  that  to  tax  property  and  income 
from  property  is  intolerable  as  double  taxation.  The  report 
IS  redeemed  however  by  some  wise  suggestions  as  to  the  taxa- 
tion of  mortgages,  culmmating  in  the  recommendation  of  the 
Massachusetts  system.  In  regard  to  new  taxes,  the  commis- 
sion propose  a  collateral  inheritance  tax,  a  tax  on  private  and 
special  acts  passed  by  the  legislature,  and  an  extension  of  the 
corporation  taxes. 

loqis'^T^  '""^^'^-f'^  ^'  the  Pennsylvania  commission  of 
1890.  The  majority  report,  while  disclaiming  anv  attempt 
to  chaiige  state  taxes,  proposed  to  improve  the  local  "system  by 
conipelling  eveiy  person  to  answer  a  list  of  interrogatories  as 
to  his  personal  property.  Furthermore,  transportation  com- 
panies were  to  be  made  liable  to  local  burdens  by  a  tax  on  the 
average  va  ue  per  mile  of  the  entire  property  multiplied  by  the 
mileage  m  the  county.  As  a  result  large  cities  in  which  the  ter- 
rnma Is  are  of  unmense  value  would  get  no  more  revenue  than  lit- 
tle villages  In  short,  there  is  scarcely  a  recommendation  in  the 
report  which  does  not  contradict  the  teachings  of  sound  finance. 

ft^^Tn/cllf^  "  '^  ^^"-'^^"^  ^^^^  -  ^-«^^-  ^n  American 
»  Report  of  the  Special  Tax  Commission  of  Maine,  Aueusta  ISQO   TQ9  r.r. 
^Report  of  the  Revenu.  Commission  appointed  'byZ'.    ^nlZZ 
of  Pennsylvania,  Philadelphia,  1890,  198  pp.  ^     *^  •  •  •  ^gislature 


602 


ESSAYS  IN  TAXATION 


H 


I 


The  three  minority  reports  as  a  consequence  savagely  attacked 
the  majority.  The  auditor-general  proposed  that  the  common- 
wealth treasury  should  assume  a  further  share  of  the  local 
expenses,  or  that  it  should  relinquish  to  the  counties  more  of 
its  surplus  revenues.  Mr.  Bolles  approved  of  the  income-tax 
project  to  be  mentioned  in  a  moment,  maintainmg  that  the 
chief  revenue  of  the  state  should  be  from  railroads,  and  that 
most  of  the  other  subjects  of  taxation  should  be  surrendered 
to  the  counties.  The  chief  contribution  consists  of  the  three 
papers  by  John  A.  Wright.  He  laid  down  twelve  principles, 
which  may  be  summed  up  in  the  demand  for  a  general  income 
tax.  His  plan  was  that  the  state  should  tax  the  net  income  of 
corporations,  the  amount  of  sales  of  all  merchants,  and  the 
gross  income  of  all  individuals  from  trades,  professions  and 
occupations.  On  the  other  hand,  he  would  have  the  local 
divisions  tax  real  estate,  horses,  mules,  oxen  and  vehicles,  and 
levy  certain  licenses. 

There  are  many  striking  points  in  Mr.  Wright's  papers.  His 
scathing  criticism  of  the  majority  report,  his  appreciation  of 
the  injustice  of  the  property  tax,  his  argument  that  revenue 
and  not  property  should  be  the  basis  of  taxation,  his  proof 
that  an  income  tax  is  really  less  inquisitorial  than  a  property 
tax,  his  grasp  of  some  of  the  difficulties  of  interstate  taxation — 
all  these  put  his  three  papers  in  the  front  rank  of  the  literature 
on  American  finance.  On  the  other  hand,  whole  subjects — 
such  as  the  question  of  graduated  taxation,  of  the  distinction 
between  permanent  and  precarious  incomes,  and  double  taxa- 
tion— are  ignored.  Furthermore,  there  are  evidences  of  im- 
mature, or  at  all  events  of  not  sufficiently  penetrating,  thought — 
as  on  the  subject  of  debt  exemption,  on  incidence  (where  the 
diffusion  theory  is  again  dished  up) ;  on  the  protection  theory 
of  taxation;  and  on  deductions  from  income.  But  with  all  its 
faults,  his  report  is  one  of  the  best  official  documents  hitherto 
published. 

As  a  result  of  the  tax-commission  report  of  1890,  a  bill  was 
introduced  in  the  Pennsylvania  legislature,  but  met  with  op- 
position sufficient  to  defeat  it.  It  was  thereupon  proposed  by 
one  of  the  senators  that  representatives  of  the  different  interests 
be  called  together  to  ascertain  the  facts  and  to  report  a  bill. 
As  a  consequence,  twenty-four  representatives  of  agriculture, 
transportation,  labor,  commerce  and  manufactures,  and  tax 
officials  met  at  Harrisburg  early  in  1892.    This  conference  ap- 


AM  ERIC  AN  REPORTS  ON  TAXATION  603 

pointed    committees    to    examine    the   value  of   the   various 
classes  of  property  in  the  commonwealth;  to  study  the  tax 
laws  of  all  the  states;  and  to  formulate  a  statement  of  prin- 
ciples.   The  first  to  render  a  report  was  the  committee  on  tax 
laws.    This  report '  is  valuable  chiefly  for  the  tables  which 
digest  the  tax  laws  of  the  Union.     The  committee  make  but 
few  recommendations— generally  of  a  sensible  character      They 
maintain  that  an  income  tax  will  not  be  equitably  levied  bv 
locally  elected  officials,  and  that  a  single  tax  on  land  valu^ 
will  mcrease  the  burden  on  the  poor.     They  find  the  best 
features  of  the  Pennsylvania  system  to  be  the  separation  of 
the  sources  of  state  and  local  taxation.     The  next  to  report 
was  the  commission  on  valuation  which  ^  attempted  to  as- 
certain actual  values  by  taking  the  insurance  valuations  on 
insurable   property,    and    by   making   special    investigations 
through  separate  agents. 

Reports  on  the  valuation  of  railroads,  other  transportation 
companies,  manufacturing  corporations  and  real  estate  ^  soon 
followed.  At  the  conclusion  of  its  labors  the  conference  sub- 
mitted a  bill  to  separate  state,  county  and  local  sources  of 
revenue.  The  state  taxes  on  inheritances,  on  commissions,  on 
municipal  loans  and  on  certain  licenses,  as  well  as  the  local 
real  estate  tax  were  left  unchanged.  But  the  bill  transferred 
certain  taxes  and  fees  from  the  state  to  the  counties;  and  the 
tax  on  horses  and  cattle  from  the  counties  to  the  minor  civil 
divisions  It  also  changed  the  state  taxes  on  corporations. 
Although  the  bill  finally  failed  to  become  law,  the  conference 

^Report  of  the  Committee  appointed  to  examine  the  Tax  Laws  of  other 
frTa^^^tt'^TmriS  ;;^^'^^'^^^-  -  «^--^  ^'^  ^ovemin,  Principles 

2  Valuation,  Taxation  and  Exemption  in  the  Commonwealth  of  PennsvU 
vanm  A  Report  by  the  Commission  on  Valuation  and  Taxation,  Joseph  D. 
Weeks,  Chairman,  Harrisburg,  1892,  34  pp. 

mJ''^^^^''  """^o  ^«^«^T  ""^  ^^i^^oads  in  Pennsylvania,  Harrisburg, 
^jf;  o^^*  ,^^^''''9  Price'  ^^^^^sed  Valimtion  and  Taxation  of  Real 
Estate  in  Pennsylvania,  (mZ),  20  pp.;  Minor  Reports  on  Street  Railroads, 
Lanal  Companies  and  Mortgage  Indebtedness  (1893).  Cf.  also-  The  Niles 
I  ax  BzU  An  Armlysis  of  its  Provisions.  By  the  Chairman  of  the  Tax  Con- 
ference, 1893,  15  pp.;  Effect  of  the  proposed  Revenue  Billon  the  sZe 
/|.en^.^    By  Joseph  D   Weeks,  Chairman  of  the  Tax  Conference,  1895, 

ii^^/'.K  V''''^"^  ^-^  ^^'  ^"''^^  ^^"-    ^y  C-  ^^tuart  Patterson,  L  meml 
her  of  the  Tax  Conference,  1895,  23  pp.;  Speech  of  C.  Stmrt  Patterson  an 

ISO.   'ff '''''  of  Railroads,  1895,  24  pp.;  and  M.  E.  Olstead,  Riter  Tax  BiU. 
lo95,  36  pp.  » 


II 


I 

I 

1 


604 


ESSAYS  IN  TAXATION 


m 


I 


was  a  novel  experiment,  based  entirely  on  voluntary  ac- 
tion, and  the  work  was  taken  up  ia  the  proper  spirit.  If  the 
practical  results  did  not  amount  to  much,  it  is  probably  due 
to  the  weakness  of  human  nature  and  to  the  inherent  difficulties 
of  the  task. 

In  the  meantime  a  few  other  commissions  were  at  work.  The 
Oregon  report  of  1891  ^  was  insignificant  with  the  exception 
that  it  proposed  the  abolition  of  the  mortgage-tax  law.  In 
Boston  the  situation  was  so  unsatisfactory  that  two  reports 
were  issued— the  tax  committee  of  1889  ^  recommending  an 
inheritance  tax  and  the  securing  of  revenue  from  municipal 
monopolies,  while  the  conmiission  of  1891  discussed  the  prob- 
lems of  double  taxation  and  the  exemption  of  personalty.^ 
The  New  Jersey  commission  handed  in  a  confessedly  in^  perfect 
report,  composed  largely  of  extracts  from  previous  commissions 
and  showing  that  it  had  not  made  much  independent  study  of 
the  subject.* 

Passing  over  the  report  of  the  Iowa  commission  of  1893  ^ 
which  was  of  little  consequence,  we  come  to  the  report  of  the 
Delaware  commission  which  consists  of  two  parts.^  Delaware 
raised  its  state  revenues  from  corporation  taxes  and  licenses, 
but  depended  for  its  local  revenues  upon  the  poll  tax,  the  tax  on 
real  estate,  and  on  a  few  kinds  of  tangible  personalty.  The 
farmers  desired  to  reach  all  owners  of  personalty.  The  majority 
report  approves  of  this  desire,  recommends  that  intangible 
personalty  be  taxed,  that  a  tribunal  be  created  for  equalizing 
county  assessments,  and  that  the  collateral  inheritance  tax  be 
reimposed.  The  minority,  on  the  other  hand,  object  to  the 
taxation  of  intangible  personalty.  Almost  the  whole  of  the 
report  is  an  abridgment  of  the  New  York  reports  of  1871-72 
and  of  the  Maryland  report  of  1888,  showing  the  injustice  of 
the  general  property  tax.    Although  the  conmiissioners  sym- 

*  Report  of  the  Special  Senate  Committee  on  Assessment  and  Taxation. 
Salem,  1891,  10  pp. 

^Boston  Executive  Busiriess  Association.  Report  of  Special  Committee 
on  Taxation^  Boston,  1889,  32  pp. 

'  Rei)ort  of  the  Special  Commission  in  Taxation,  Boston,  1891,  29  pp. 

*  Preliminary  Refxyrt  of  the  Commission  on  Taxation  made  to  Governor 
Abbott,  Trenton,  1891,  25  pp. 

^  Report  of  the  Revenue  Commission  of  the  Slate  of  Iowa,  Des  Moines 
1893,  66  pp. 

«  Report  of  the  undersigned  Members  of  the  Delaware  Tax  Commission  to 
the  General  Assembly,  2  parts,  WUniington,  1893,  32  pp.,  16  pp. 


AMERICAN  REPORTS  ON  TAXATION 


605 


pathize  with  the  complaint  of  the  Delaware  farmer,  they 
thmk  that  under  the  present  system  the  taxes  are  ''more 
equally  distributed  than  in  any  other  state." 

More  important  are  the  New  York  reports  of  1893  one  ^  by 
the  counsel  to  revise  the  tax  laws,  the  other '  by  a  joint  com- 
mittee  The  counsel  suggest  that  the  information  obtained 
from  their  researches  be  collated  for  the  use  of  the  public  for 
further  reference;  but  in  the  present  report  they  prefer  simply 
to  present  their  conclusions.  They  object  to  the  ''building 
occupancy"  tax,  because  the  legislature  refused  to  adopt  it  in 
1872;  to  the  smgle  tax,  as  unequal;  and  to  the  income  tax  as 
inquisitorial.  They  also  object  to  any  increase  in  the  corpora- 
tion tax  on  the  ground  that  this  ought  to  carry  with  it  an  ex- 
emption from  local  taxation,  as  in  Pennsylvania— a  plan  which 
they  thmk  unwise.  They  oppose  a  tax  on  corporate  bonds  for 
various  reasons,  and  object  to  "local  option,"  because  they 
believe  that  it  sunply  means  taxation  of  realty  alone. 

The  report  of  the  legislative  committee  "is  more  radical. 
They  agree  in  opposing  the  income  tax  and  the  principle  of 
local  option.    But  they  maintain  that  the  taxation  of  savings- 
bank  deposits  is  undesirable;  that  the  equalization  of  taxes 
on  personalty  would  "legalize  a  system  of  official  guessing," 
and  only  intensify  the  conflict  between  the   local    divisions; 
but  that  a  state  tax  on  mortgages  would  be  acceptable.    They 
propose  certain  changes  in  the  inheritance  and  corporation 
taxes  and  commend  the  separation  of  state  and  local  revenues. 
We  come  now  to  what  is  perhaps  the  best  of  the  reports  of 
this  period— that  of  Ohio.^     Most  of  the  theories   advanced 
are  m  accord  with  the   sounder  views,   and   everywhere   an 
endeavor  is  made  to  conform  to  the  necessities  of  practical 
reform.    The  commission  tell  us  that  the  "tax-inquisitor"  law 
produces  less  than  two  per  cent  of  the  taxes;  while  intangible 
property  altogether  pays  only  nine  and  four-tenths  per  cent  of 
the  state  taxes,  costing  La  some  of  the  counties  thirty-four 
per  cent  to  collect.    They  maintain,  however,  that  as  the  only 
just  principle  of  taxation  is  that  of  contribution  according  to 
ability,  an  effort  must  be  made  to  reach  intangible  personalty 

»  Report  of  the  Joint  Committee  of  the  Senate  and  Assembly  relative  to 
laxatwnfor  State  and  Local  Purposes,  New  York,  1893,  602  pp. 

2  Report  of  Counsel  to  revise  the  Tax  Laws  of  the  State' of  New  York  Al- 
bany, 1893,  125  pp.  J        u;  z  otk,  ai 

'  Report  of  the  Tax  Commission  of  Ohio,  Cleveland,  1893,  77  pp. 


606 


ESSAYS  IN  TAXATION 


!l 


i 


if'ii 


I 


i 


in  some  other  way.  In  a  well-devised  system  taxation  must  on 
the  whole  be  proportional  to  income  or  earnings,  and  yet  the 
direct  income  tax  they  think  virtually  impossible  as  a  state 
tax.  Hence  the  necessity  of  getting  at  the  income  indirectly. 
Th^ir  solution  of  the  problem  may  be  summed  up  in  a  few 
words:  taxation  of  real  estate  and  tangible  personalty;  an 
inheritance  tax,  increased  and  extended;  a  franchise  tax  on 
the  earning  capacity  of  corporations  and  business  enterprises; 
and  the  beginnings  of  a  system  of  business  taxes,  through  a 
tax  on  transfers  of  property,  on  law  proceedings,  etc.  Alto- 
gether, the  report  of  the  Ohio  commission  is  one  of  the  most 
cheering  evidences  of  the  growth  of  saner  and  more  enlightened 
views  on  the  subject  of  taxation. 

The  next  report  is  that  of  the  Massachusetts  conunission  of 
1894.^  Although  it  contains  a  few  good  suggestions,  it  discloses 
little  acquaintance  with  modern  views,  and  is  distinctly  inferior 
in  this  respect  to  that  of  the  Ohio  conunission.  The  final 
recommendation  is  nothing  more  nor  less  than  the  introduction 
of  the  listing  system.  This  is  the  sorry  outcome  of  a  long 
inquiry.  On  the  other  hand,  the  commission  oppose  the  single- 
tax  theory  and  advocate  a  graduated  inheritance  tax.  This  was 
fortunately  the  only  proposal  subsequently  enacted  into  law. 
Three  years  later  another  Massachu^^etts  commission  made 
a  report  which  was  a  distinct  improvement.^  Like  the  Mary- 
land report  of  1888,  it  shows  the  advantages  of  having  a  trained 
economist  on  the  commission ;  for  in  this  case  Professor  Taussig 
was  doubtless  largely  responsible  for  the  well-considered  series 
of  recommendations.  The  report  is  divided  into  three  parts. 
The  first  gives  an  account  of  the  existing  tax  laws.  The  second 
which  describes  the  actual  workings  of  the  system,  discusses, 
among  other  questions,  that  of  the  taxation  of  mortgages. 
The  commission  declare  themselves  satisfied  with  the  situa- 
tion. In  the  discussion  of  the  tax  on  personal  property  they 
show  that  the  classes  most  regularly  and  unfailingly  taxed  are 
live  stock  in  the  farming  towns  and  ships  and  vessels.  As  re- 
gards the  farming  towns,  the  commission  conclude  that  the 
method  of  taxing  both  real  estate  and  tangible  personalty 

*  A  Full  Report  of  the  Joint  Special  Committee  on  Taxation,  Boston,  1894, 
109  pp. 

2  Report  of  the  Commission  appointed  to  inquire  into  the  Expediency  of 
revising  and  amending  the  Laws  of  the  Commonwealth  {of  Massachusetts) 
relating  to  Taxation,  Boston,  1897,  viii.,  322  pp. 


AMERICAN  REPORTS  ON  TAXATION  607 

probably  works  better  than  would  a  method  of  taxing  realty 
alone.    The  commission  also  defend  the  tax  on  stock  in  trade 
a^  giving  some  clew  to  relative  tax-paying  abilities.    Further- 
more, they  look  forward  to  the  time,  when  it  may  be  possible 
to  exempt  machmery.    The  taxation  of  intangible  personalty 
they  declare  to  be  m  a  high  degree  unsatisfactory.    The  third 
part  of  the  report  contains  the  recommendations.     The  com- 
mission propose  that  all  securities    representing    interest  in 
property  outside  of  the  state  be  exempted  from  taxation     The 
question  then  arises  as  to  the  substitute.    The  income  tax  is 
brushed  aside  as  inexpedient.     The  Pennsylvania  and  Con- 
necticut methods  are  discussed,  but  not  recommended      In- 
stead, the  two  new  taxes  suggested  are  an  inheritance  tax 
and  a  habitation  tax.  ' 

These  are  the  chief  points  of  the  report,  which  represents  an 
earnest  effort  to  grapple  with  the  difficulties.  Although  it  had 
little  success  in  shaping  legislation,  it  is  one  of  the  clearest  and 
strongest  papers  presented  up  to  that  time  by  any  American 
tax  commission. 

The  intervening  years  are  marked  by  seven  minor  reports. 
1  hree  of  these  are  municipal.  The  city  of  Chattanooga  recom- 
mended a  permanent  tax  commission.^  Cleveland  made  two 
reports  in  vvhich  Mr.  Angell,  the  moving  spirit  of  the  Ohio 
report  of  1893  repeated  his  arguments  against  the  tax-in- 
quisitor  law.-  The  New  Jersey  commission  made  a  report  on 
railway  taxation,  in  which  it  recommended  a  relinquishment  of 
the  second-class  property  tax  to  the  localities.^  Finally  the 
growing  interest  manifested  in  the  subject  is  attested  by  three 
reports  of  the  Illinois  and  the  Connecticut  Bureau  of  Labor 
{Statistics,  devoted  entirely  to  taxation.^ 

Most  of  the  reports  thus  far  discussed  were  those  of  Eastern 
states.    It  is  significant  that  toward  the  close  of  the  century 
'  Report  of  the  Committee  of  the  Chamber  of  Commerce  of  Chattanoooa 
Tennessee  on  Assessments  ami  Taxation,  Chattanooga,  1895;  22  pp 

mittl    m^^^^.     t'"  f  ^'"^T"''  ^"^^^^■^^'    ^P'''  'f  ^  A;  Com. 
1896%  pp  ^^"  '^'^^^tion.     Report  of  Special  Committee,  Cleveland, 

mT^m  ""^  ^^^  ^^^^*'«^«^  ««  investigatee  the  subject  of  Taxation,  Trenton, 

*  Eighth  Biennial  Report  of  the  Bureau  of  Labor  Statistics  of  Illinois 
Springfield    1894,  2d  ed.,  1896;  Twelfth  AnmM  Report  oftlBiZZof 

11:^:1X^1":^^^^  '^^^^^  franchises  and 


608 


ESSAYS  IN  TAXATION 


III 


I 


if 
II 


the  discontent  now  spread  to  certain  parts  of  the  West  and  of 
the  South.  The  Wisconsin  commission  ^  apologize  for  their 
unsatisfactory  conclusions,  on  the  ground  that  the  time  and 
the  means  at  their  disposal  were  insufficient  to  enable  them 
to  elaborate  any  general  plan  of  revision.  The  report  contains 
a  good  account  of  the  origin  and  growth  of  the  tax  system,  an 
analysis  and  criticism  of  present  methods,  and  some  sensible 
remarks  as  to  wide-reaching  reforms.  For  the  first  time  in 
any  of  the  Western  states  the  commission  express  doubt  as  to 
the  wisdom  of  the  general  property  tax.  Yet  they  shrink  from 
recommending  any  radical  changes,  for  the  reason  that,  "the 
great  majority  of  the  people  are  still  so  much  attached  to  the 
general  property  system  that  suggestions  or  discussions  of 
radical  changes  would  not  be  acted  upon  or  considered." 

This  conclusion  is  quoted  in  the  report  of  the  Texas  com- 
mission,2  which  appeared  a  few  months  later.  The  Texas 
commission  was  by  no  means  so  able  or  so  well  acquainted  with 
the  literature  of  the  subject  as  that  of  Wisconsin,  and  its  ac- 
tivity was  limited  by  the  provisions  of  the  act  which  made  it 
its  duty,  "to  frame  a  bill  or  bills  calculated  to  secure  an  ex- 
haustive and  equitable  assessment  of  every  species  of  property." 
As  a  consequence,  the  report  only  slightly  considers  any  changes 
which  would  impair  the  principle  of  the  general  property  tax. 
The  commission  search  in  vain  for  any  changes  in  the  existing 
method  which  hold  forth  prospect  of  success.  On  the  other 
hand  the  report  of  the  Georgia  commission  of  the  same  year 
was  so  radical  that  it  failed  of  consideration  by  the  legislature 
and  so  voluminous  that  it  never  saw  the  light  in  printed  form. 

The  joint  committee  of  New  York  ^  after  considering  al- 
ternative propositions  for  an  increase  of  much  needed  revenue, 
finally  recommended  a  tax  on  mortgages.  They  proposed  to 
abolish  the  law  which  provided  for  the  taxation  of  mortgages 
as  a  part  of  personal  property  both  for  state  and  for  local  pur- 
poses, and  to  substitute  a  tax  of  one-half  of  one  per  cent,  to  be 
levied  only  for  state  purposes.  It  was  estimated  that  this 
would  yield  about  $10,000,000.     The  proposition  gave  rise 

*  Report  of  the  Wisconsin  State  Tax  Commission,  1898,  Madison,  1898. — 
276  pp. 

2  Report  of  the  Tax  Commission  created  by  Act  of  March  1,  1899,  to  in- 
quire into  the  System  of  Laws  and  Regidations  now  in  Force  affecting  the 
raising  of  Public  Revenue,  etc.,  Austin,  1899. — 403  pp. 

'  Report  to  the  Legislature  of  New  York  by  the  Joint  Committee  on  Taxation, 
January  15,  1900.— 26  pp. 


AMERICAN  REPORTS  ON  TAXATION  609 

to  a  heated  debate.  The  unintelligent  advocates,  who  believe 
that  a  tax  will  always  rest  at  the  point  of  original  impact,  sup- 
ported the  proposition  on  the  general  theory  of  hitting  the 
wealthy  who  now  escape.  The  unintelligent  opponents  sought 
to  show  that  It  would  be  a  burden  on  the  poor  man,  because 
he  puts  his  accumulations  in  the  savings  banks  which  are  vir- 
tually limited  in  their  investments  to  mortgages  on  New  York 
realty.  The  real-estate  brokers  although  divided  beUeved  that 
the  new  tax  would  interfere  with  their  business  and  there- 
fore joined  the  opposition.    In  the  end  the  bill  failed  of  .passage. 

The  problem  of  mortgage  taxation  was  also  made  the  subject 
of  a  Vermont  report  in  the  same  year.i  The  committee,  after  con- 
sidering the  subject  from  every  point  of  view  recommended 
that  mortgages  bearing  a  rate  of  interest  not  exceeding  41^% 
should  be  exempted  from  taxation.  Any  possible  decrease  in 
revenue  would,  m  their  opinion,  be  more  than  compensated  by  a 
shght  increase  in  the  corporation  taxes. 

This  concludes  the  reports  of  the  period.  Everywhere,  it 
has  been  seen,  the  inadequacy  of  the  general  property  tax  was 
being  realized;  but  a  way  out  of  the  difficulties  was  not  yet 
clearly  perceived.  It  was  reserved  for  the  next  period  to  throw 
some  real  light  on  the  topic  and  to  prepare  the  way  for  construc- 
tive recommendations. 

III.  The  Period  1901-1910 

We  have  thus  far  considered  the  reports  of  tax  commissions 
up  to  1900.  In  the  new  century  we  find  not  only  a  great  in- 
crease m  the  activity  of  such  special  commissions,  but  also  the 
appearance  of  periodical  reports  by  permanent  tax  commissions. 
These,  it  is  true,  were  not  entirely  absent  from  the  early  history 
of  state  finance.  Massachusetts  had  created  the  office  of  State 
Tax  Commissioner  in  1865,  Maryland  in  1878,  and  Vermont 
in  1882,--all  of  them  designed  primarily  to  assess  certain  cor- 
poration taxes.  In  1891  New  Jersey  initiated  a  State  Board 
of  Taxation  and  Indiana  a  State  Board  of  Tax  Commissioners, 
each  of  which  was  invested  with  more  important  duties  than 
the  ordinary  boards  of  equalization;  and  in  1896  New  York 
followed  with  a  similar  State  Board.  All  of  these  officials  or 
boards  published  annual  reports  which  were  largely  formal  in 

»  Double  Taxation  in  Vermont.  Report  of  the  Special  CommUtee  appointed 
to  report  a  Measure  for  its  Relief  to  the  Legislature  of  1900,  Burlington  1900  — 
44  pp.  &      >  • 


610 


ESSAYS  IN  TAXATION 


ii, 


1 11 


lij' 


W 


m 


character  With  the  beginning  of  the  new  centurj^  however 
we  note  the  development  of  permanent  commissions  with  much 
broader  powers,  and  in  whose  annual  or  biennial  reports  we 
now  find  the  tax  problems  discussed  from  a  wider  outlook  The 
first  report  was  that  of  Wisconsin  in  1900,  followed  by  that 
of  Michigan  in  1901.  By  1910  nine  such  commissions  were 
.  m  existence  and  during  the  next  eleven  years  twenty-five  more 
states  followed.!  On  the  other  hand,  the  Idaho  commission 
was  abolished  m  1915,  the  Florida  commission  in  1918,  and 
the  Wyoming  commissioner  in  1919. 

In  most  cases  they  were  called  simply  the  State  Tax  Com- 
mission. ^  In  a  few  states  they  were  known  by  other  names- 
in  three  -  they  were  called  the  State  Board  of  Tax  Commis- 
sioners or  Board  of  State  Tax  Commissioners;  in  seven  '  State 
lax  Commissioner;  in  one  ^  the  State  Board  of  Taxes  and 
Assessments;  in  one  ^  Commissioner  of  Corporations  and 
Taxation;  m  one «  Board  of  State  Assessors;  and  in  one '  the 
btate  School  Tax  Commissioner. 

^x.^^}^''^''  permanent  tax  commissions,  the  Wisconsin  and 
the  Mmnesota  reports  have  been  easily  the  most  important. 
Worthy  of  note  also  have  been  those  of  Washington,  West 
Vu-gmia  and  Michigan,  and,  in  more  recent  years,  those  of 
Connecticut,  Rhode  Island  and  New  York.  We  mav,  however 
omit  any  further  treatment  of  this  phase  of  the  subject  as  it  hai 
now  been  fully  discussed  in  a  recent  publication.^ 

1  We  appen<i  a  list  of  states  with  permanont  commissions  with  the 
date  of  appearanro  o    the  first  re,K>rt:  1900,  Wisconsin;  1901,  Michigan 
1902,   Connecticut,  North  Camlina;   1906,   West  Virginia,   Washington 
I^f'    m  ('  v^^'^r^'  ^?^'  Minnesota;  1909,  Kansa^;  1910.  Ohio   Wy- 

N^Hh  n  L  '/    PK^rPt''^/  ^'^^^"'^'  '^'-'  ^'^'"^^^^  ^^^^'^^^^^^  Colorado, 
North  Dakota   Rhode  Ishmd;  1914,  FIori<!a.  Georgia,   Idaho    Montana 

Nevada,  South  Dakota;  1915,  Maryland,  New  JersJy,  Ch  CaTohna'. 

9U,,   New  Mexico,  N^  York,  Mississippi;  1918,  Kentucky.  Mi^ouri;' 

1920,  Massacusetts;  1921,  Delaware.  ' 

2  Inrliana,  Michigan,  an(i  Rhode  Island. 

'Connecticut,  Georgia,  Montana,  North  Dakota  (since  1919)    Texa^ 
Washmgton  (smce  1917)  and  West  Virginia.  '  ' 

*New  Jersey. 

*  Massachusetts. 

•  Vermont. 

^  Delaware.     So  called  because  the  proceeds  of  new  personal  income 
tax  and  gonoral  corporation  tax  are  to  be  dovotcxl  to  school  purjj^ 
»HarIcy  L.  Lutz,  The  Stale  Tax  Commissiofi.    A  Stwlu  of  the  Dfi^Jnn. 


I 


AMERICAN  REPORTS  ON  TAXATION  611 

Before  we  take  up  the  special'  commission  reports  of  this 
periwi,  It  will  be  well  to  devote  a  word  to  the  proceedings  of  an 
unofficial  convention,  which  did  its  share  in  helping  to  arouse 
general  mterest  m  the  subject.     We  refer  to  the  National 
Conference  on   Taxation   at  Buffalo.'     The   conference   was 
attended  not  only  by  students  of  the  problem,  but  by  men  en- 
gaged m  the  administration  of  the  revenue  laws,  as  well  as  bv 
representatives  of  the  important  interests  subject  to  taxation 
As  a  consequence,  the  papers  were  varied  and  interesting-  and 
the  proceedings  were  enlivened  by  an  active  discussion.    Papers 
on  general  topics  were  read  by  such  men  as  Senators  Garfield  of 
Ohio  and  Bucklm  of  Colorado,  Mr.  Judson  of  Missouri,  Mr 
Seward  and  Mr.  Purdy  of  New  York,  and  Judge  Howard  of 
inaiana.     Ihe  academic  element  was  represented  by  Professor 
Henry  C  Adams,  Dr.  Max  West,  Dr.  R.  H.  Whitten,  Professor 
Beinis,  the  author  of  this  volume,  and  others.    The  bankers 
were  represented  by  Hon.  C.  S.  Fairchild;  the  railways,  by  " 
Mr  Davies  and  Mr.  Hines;  the  insurance  companies,  bv  Mr 
Hoffman  and  Mr.  Fryer;  and  the  farmers,  by  Mr.  Creasy  of 
the   Pennsylvania   State   Grange.     The   conference   adopted 
resolutions  m  favor  of  the  avoidance  of  double  taxation  and 
looking  to  co-operation  among  the  states.    Provision  was  also 
made  for  the  appomtment  of  an  executive  committee,  to  whom 
should  be  mtrusted  the  arrangements  for  the  development  of  a 
permanent  organization. 

The  first  tax  commissions  to  report  in  the  new  centuiy  were 
those  of  Cobrado  and  Kansas.  Senator  Bucklin  was  responsi- 
ble for  the  Colorado  report,  which  attracted  attention  because 
of  Its  advocacy  of  the  taxation  of  land  values.^  The  commission 
opposed  the  mheritance  tax  and  had  practically  nothing  to 
say  of  the  corporation  tax.  But  to  the  extent  that  they  recom- 
mended a  constitutional  amendment,relaxing  the  rigid  provisions 
on  taxation,  they  secured  the  support  even  of  those  who  were  not 
prepared  to  go  to  the  length  of  accepting  their  entire  plan 

At  the  Buffalo  conference  the  officials  of  Indiana  advanced 
the  clami  that  their  system  was  far  superior  to  that  in  the 
other  states.     The  Kansas  commission  '  were  so  much  im- 

^  NfUumal  ConMence  on  Taxation,  under  the  auspices  of  the  National 
CvncFcderat^m.    HeUatBuffah,  New  York,  May 23^24, 1901. -l^^ 
Import  of  theRtmnue  Commission  of  Colorado,  Denver,  1901.-62  pn 
'^Porl  and  BM  of  the  Kansas  State  Tax  Commissio^,  Topeka,  1901. 


612 


ESSAYS  IN  TAXATION 


4 


H 


w 


pressed  by  this  contention  that  they  decided  to  recommend 
the  adoption  of  the  Indiana  method  of  taxing  corporations. 
While  the  commission  still  cling  to  the  general  property  tax^ 
some  of  the  discussions  at  Buffalo,  especially  those  relating  to 
the  taxation  of  mortgages,  evidently  bore  fruit;  for  the  com- 
mission tell  us  that  this  "is  another  illustration  of  that  curious 
shifting  of  the  burden  of  taxation,  which  we  are  just  beginning 
to  understand." 

The  report  of  the  West  Virginia  commission  i  shows  un- 
mistakably that  they  profited  by  the  Buffalo  Conference.  The 
preliminary  report  contents  itself  with  putting  the  recom- 
mendations for  and  against  changes  in  the  methods  of  taxation 
m  a  fair  and  lucid  way.  In  the  final  report  ^  the  commission 
maintain  that  the  best  plan  is  to  abandon  the  attempt  to  assess 
intangible  personal  property.  They  confess,  however,  that 
under  the  constitution,  this  is  impracticable.  While  waiting 
for  an  amendment,  they  recommend  that  the  system  of  de- 
duction for  debts  be  extended  to  intangible  personalty,  that 
mortgages  be  exempted,  and  that  the  separation  of  sources  be 
introduced. 

The  Vermont  report  ^  confines  its  attention  to  the  discussion 
of  corporations  and  the  grand  list.  The  volume  contains  a 
concise  history  of  the  tax  on  each  kind  of  corporation,  with  a 
recommendation  to  introduce  a  progressive  rate  into  the 
earnings  tax.  The  grand  list  is  declared  to  be  in  a  very  unsat- 
isfactory condition,  not  representing  by  any  means  the  true 
cash  value  of  either  real  or  personal  property.  This  statement, 
however,  is  followed  as  an  anticlimax  by  the  recommendation 
of  a  board  of  equalization  as  a  remedy.  It  is  evident  that  the 
economic  conditions  in  Vermont  were  not  yet  those  of  a  de- 
veloped industrial  state. 

The  Minnesota  commission  ^  tell  us  that  in  "passing  to  the 
assessment  of  personal  property,  we  enter  a  field  of  confusion 

1  Preliminary  Report  of  the  West  Virginia  Stale  Tax  Commission,  1902 
Charleston — 45  pp. 

2  Preliminary  and  Final  Report  of  the  West  Virginia  State  Taxation  Com- 
mission, 1902.     Charleston— 78  pp. 

3  Special  Report  of  the  General  Assembly  {of  Vermont),  1902,  relating  *o 
Taxation  of  Corporations  and  Individuals.  By  the  Commissioner  of  State 
Taxes.  Burlington,  1902.— 134  pp. 

*  Report  of  the  Tax  Commission  of  Minnesota  created  by  Chapter  13, 
General  Laws  of  1901,  for  the  purpose  of  framing  a  Tax  Code.  St.  Paul) 


AMERICAN  REPORTS  ON  TAXATION  613 

ZnLToMh'^'r- r   ^^'^  r-^o«^«^endation  is  a  half-hearted 

sepamtiL^^^^^^^^^  r'r-     ^^'^  ^"^S^«^'  ^«^^^^^^  ^he 

separation  of  state  and  local  revenues  and  have  something  to 

report  is  the  suggestion  of  an  income  tax. 

how  th^TtH'  /T"*/  f  ^  "'^^"^^  ^^^-  The  commission 
r^nf  J  1  ^^.f^«t\«f  the  general  property  tax  may  be  cor- 

llu^i  by/fl"™g  the  assessor  to  put  into  separate  columns 
oHsh  r  ^T^^^^^.1^^^  If'  however,  this  does  not  accom! 
phsh  the  results  anticipated,  -it  certainly  can  be  no  worse  in 
practice  than  the  system  now  in  vogue."  The  existing  system 
IS  so  bad  we  are  told,  that  any  attempt  to  present  statistic 
on  the  subject  would  be  useless.    Missouri,  also,  it  is  clear,  had 

H.ffiolnl  ^  'Ti  ^  ^^^^'^^  ^^^'^  '^  ^^«  ^^^^y  to  face  the  real 
ditiiculties  of  the  problem. 

The  report  of  the  New  Jersey  commission  ^  of  1905  deals 
almost  exclusively  with  railways.  They  recommend  that  the 
rate  on  the  mam-stem  property  be  increased  and  that  the 
second-class  property,  although  still  assessed  by  the  state 
board,  be  taxed  at  the  full  local  rate  for  the  benefit  of  the  h^ 
canoes     Their  recommendation  was  adopted  by  the  so-called 

fndtlQOr.'.'  '''?•    ^"*  ^'^^  '^^  ^^^  '-'^'y  Public  opinio 
and  m  1906  the  system  was  again  changed  in  several  respects.^ 

Jhe  conditions  m  Ontario,  Canada,  were  so  similar  to  those 
obtaimng  m  our  states  that  the  problems  of  taxation  were 
rS/r  f  "'•  The  commission  appointed  to  consider  the 
[hp  TW^^^^^^^  accordingly  made  a  study  of  the  situation  in 
wrttf^n  K  v^f'  The  r^P?^t  ^  (which,  it  is  understood,  was 
written  by  Professor  Short)  is  an  able  presentation  of  the 
subject  giving  a  survey  of  the  various  systems  employed  and 
concludmg  that  the  best  method  is  to  tax  railroads  on  gro^ 
1  vJceipi/S. 

The  Oregon  report  '  devoted  its  attention  to  the  plan  whereby 

^^Report  of  the  State  Tax  Commission  of  MissouH,  1903.  Jefferson  City. 

^Report  of  the  Commissioners  appointed  to  investigate  the  Subject  of  Taxa^ 
tion  m  New  Jersey.   Trenton,  1905.-170  pp.  ^       ^ 

'  Cf.  supra,  p.  174. 

mt~2l/  ^^  ^''^'''^  Commission  on  Railway  Taxation,  1905.  Toronto, 

chaU^m  iLt'f  fZ\  ^{f  ^^^'^^■^^'^^f «  appoints  under  the  Provisions  of 
Chapter  90,  law  of  1905,  for  the  purpose  of  examining  and  reporting  on  Matters 
of  Assessment  and  Taxation.     Salem,  1906.— 332  pp  'ff  on  matters 


m 


Ml 


I 


614 


ESSAYS  IN  TAXATION 


state  expenditures  were  to  be  defrayed  by  contributions  im- 
posed upon  the  counties  in  proportion  to  local  expenditures 
instead  of  local  valuations.  This  project  was,  indeed,  not 
carried  out,  for  reasons  that  have  been  mentioned  elsewhere.^ 
The  commission  conclude  that  it  is  impossible  to  reach  per- 
sonalty by  the  present  method  of  taxation  and  suggest  that 
personalty  should  be  reached  by  a  system  of  state  taxes  on 
corporations. 

The  California  commission  was  fortunate  in  securing  as 
secretary  Professor  Plehn,  who  is  described  in  the  report  as 
an  "expert  on  taxation  and  public  finance."    This  resulted  in 
a  report  which  is  one  of  the  best  proportioned  documents  that 
have  yet  emanated  from  any  of  our  states.     The  commission 
issued  a  preliminary  report  ^    submitting  its  tentative  rec- 
ommendations to  criticism.     The  final  report  ^  contains  some 
not  unimportant  alterations,  and  shows  the  inequalities  in  the 
assessment  of  real  estate  and  the  failure  to  reach  personalty. 
The  commission  think  that  the  first  step  in  reform  is  to  bring 
about  a  separation  of  the  sources  which  they  propose  to  ac- 
complish by  securing  the  state  revenue  from  taxes  on  corpora- 
tions.   They  take  up  in  turn  the  various  classes  of  corporations 
and  discuss  the  principles  involved  in  the  taxation  of  each 
class.    In  fact  the  report  may  be  declared  to  be  a  treatise  on 
the  taxation  of  corporations.     They  suggest,  as  to  railways, 
the  tax  on  gross  earnings  in  preference  to  the  Michigan-Wis- 
consin ad  valorem  plan.    When  the  constitutional  amendment 
suggested  I)y  the  commission  was  defeated  in  1908  they  pro- 
ceeded to  prepare  a  new  amendment,  providing  for  a  complete 
separation  of  state  and  local  revenues,  the  state  revenues  to 
be  derived  from  taxes  on  the  gross  receipts  of  corporations, 
together  with  taxes  on  banks,  and  franchises  in  general.    They 
again  called  attention  to  the  defects  of  the  general  property 
tax,  the  real  meaning  of  separation,  and  the  objects  of  the  new 
scheme.^    The  commission  made  out  so  good  a  case  that  the 
amendment  was  adopted  in  1910.^ 

» Cf.  supra,  p.  363. 

2  Preliminary  Report  of  the  Commission  on  Revenue  and  Taxation  of  the 
Slate  of  California,  August,  1906.    Sacramento,  1906.— 71  pp. 

'  Report  of  the  Commission  on  Revenue  and  Taxation  of  the  State  of  Cali- 
fornia,   1906.     Sacramento,    1906.— 296   pp. 

*  RepoH  of  the  Commission  on  Revenue  and  Taxation.  Sacramento   1910 
—77  pp. 

*C/.  supra,  p.  372. 


AMERICAN  REPORTS  ON  TAXATION  615 

The  Missouri  commission  '  were  a  unit  in  agreeing  that  the 
tirst  step  in  tax  reform  is  a  separation  of  the  sources.  Thev 
therefore  discussed  this  proposition  only,  showing  its  ad- 
vantages and  recommending  the  adoption  of  a  constitutional 
amendment  to  render  such  a  separation  possible.  In  accordance 
with  this  recommendation,  a  biU  proposing  a  constitutional 
amendment,  which  provided  for  the  possibility  of  local  option 
m  taxation,  was  introduced  into  the  legislature,  and  was  sub- 
sequently enacted  into  law. 

The  Massachusetts  committee  ^  apart  from  two  brief  pas- 
sages, m  which  they  suggest  the  broadening  of  the  collateral 
into  a  direct  inheritance  tax  and  the  imposition  of  a  tax  on  the 
transfer  of  stocks,  devote  their  report  to  the  taxation  of  cor- 
porations.    In  the  treatment  of  this  subject  the  committee 
must  be  regarded  as  a  continuation  of  the  committee  on  cor- 
poration laws  of  1902.     The  report  of  that  committee  led  to 
the  law  of  1903,  which  split  the  corporation  tax  into  three 
parts,  dealmg  separately  with  street  railways  companies,  other 
public-service  corporations,  and  commercial  and  manufacturing 
corporations  in  general.    The  system  of  taxing  the  "corporat^ 
excess,    as  it  was  called,  had  given  rise  to  much  discontent 
The  new  committee  content  themselves  with  minor  suggestions 
for  the  reason  that  in  their  opinion  "the  method  now  in  opera- 
tion m  Massachusetts  in  superior  to  the  methods  in  operation 
m  the  largest  and  most  progressive  of  the  other  states."    Two 
minority  reports,  one  on  the  taxation  of  intangible  personalty 
the  other  on  the  general  tax  system,  dissent  from  these  con- 
clusions. 

The  report  of  the  New  York  tax  commission  ^  of  which  the 
writer  was  a  member,  seeks  to  attack  fundamental  problems. 
New  York  had  by  this  time  almost  reached  the  separation  of 
state  and  local  revenues.  The  first  series  of  questions  discussed 
m  the  report  pertain  to  the  state  revenue.  While  two  of  the 
state  taxes— those  on  inheritances  and  on  corporations— existed 
m  a  few  other  commonwealths,  New  York  possessed  other 

^Special  Message  of  Governor  Joseph  W.  Folk,  concerning  Reform  in 

ISo?  a^r^7^_lr;r^  ''^  "^^  ''''""""''^'  •'^'^"^^^  ''^  ''''■ 

J.f'rV^  f  "^"^""t  ^/'"^  Committee  on  Taxation,  appointed  to  con- 
^iJnlT      '^'fy  i  Z.e^^stoion  in  amendment  of  or  in  addition  to  the 
Genial  Laws  relating  to  Taxation,  January,  1907.    Boston,  1907.-136  pp 
Report  of  the  Special  Tax  Commission  of  the  Slate  of  New  York,  trans- 
mitted to  the  Legislature,  January  15,  1907.    Albany,  1907  —189  pp 


Ill 


616 


ESSAYS  IN  TAXATION 


M^i 


m 


m 


II 


taxes  of  importance  like  the  liquor-license,  the  mortgage-re- 
cording tax,  and  the  stock-exchange  tax.    The  stock-exchange 
tax  IS  discussed  in  the  light  of  a  proposition  to  extend  it  to 
produce  and  other  exchanges.     The  fullest  treatment  is  ac- 
corded to  the  inheritance  tax.     The  commission   recommend 
the  adoption  of  a  system  of  graduation  with  rates  considerably 
higher  than  exist  anywhere  else.     The  three  fundamental  prob- 
lems are  declared  to  be  the   relation  of  state   and    national 
taxation;  the  relations  of  state  and  local  taxation;  and  the 
reform  of  local  taxation.    As  regards  the  first  point,  the  com- 
mission discuss  the  situation  in  the  light  of  the  utterances  of 
President  Koosevelt,  recommending  national  income  and  in- 
hentance  taxes.     Opposition  is  shown  to  the  suggestion  of  a 
federal  inheritance  tax  on  the  ground  that  it  would  deprive 
the  states  of  one  of  the  chief  means  of  securing  tax  reform. 
Attention  is  also  called  to  the  growing  evils  of  double  taxation 
ansing  from  interstate  complications.     The  commission  rec- 
ommend the  creation  of  a  permanent  body  to  deal  with  such 
problems. 

When  they  approach  the  relation  of  state  and  local  revenues 
the  commission  distinguish  between  the  separation  of  source 
and  the  division  of  yield,  ^  suggesting  that  the  state  levy 
high  taxes  on  special  kinds  of  property  or  business  and  turn 
over  some  of  the  surplus  to  the  localities.  The  final  point  to 
which  the  commission  addressed  themselves  was  the  reform  of 
local  taxation.  Here  the  commission  were  unable  to  agree, 
although  they  did  unite  in  a  scathing  arraignment  of  the 
present  system.  A  supplementary  report  recommends  a 
more  rigorous  enforcement  of  the  existing  law.  A  second 
supplementary  report  proposes  an  income  tax;  while  the 
third  argues  against  both  of  the  preceding  suggestions  and 
recommends  the  adoption  of  a  local-option  scheme  in  order  to 
replace  the  personal  property  tax  l)y  a  graduated  habitation  tax. 

In  the  following  year  1908  no  less  than  six  reports  appeared. 
The  first  was  that  of  Massachusetts.-  The  report  of  the 
committee  of  1907^  had  been  so  inadequate  that  the  new 
commission    was    given    a    broad    scope.     After    discussing 

^  Cf.  supra,  p.  365. 

2  Report  of  the  Commission  on  Taxation  to  investigate  the  Subject  of  Taxa- 
tion and  to  codify,  revise  and  amend  the  Laws  relating  thereto.    Boston   1908 
— 234  pp.  ' 

»C/.  supra,  p.  615. 


AMERICAN  REPORTS  ON  TAXATION  617 

some  questions  connected  with  the  distribution  of  the  corpora- 
tion tax,  the  commission  deal  with  the  personal  property  tax. 
Statistics  are  presented  to  show  the  breakdown  of  this  system 
in  Massachusetts  and  elsewhere.    The  proposed  remedy  ^th^ 
adoption  of  the  Baltimore  plan  of  taxing  securities  at  a  k)w  flat 
rate.    Accordingly  they  recommend  a  constitutional  amendment 
to  permit  classification,  and  also  urge  an  increase  in  the  powers 
r^u    ^Af^         commissioner  over  local  assessors. 
Ihe  Ohio  commission  '  present  an  outline  of  the  existing 
system,  mcludmg  the  Nichols,  the  Willis,  and  the  Cole   law! 
applying  to  corporations.     The  chief  inequalities  which  thev 
discuss  are  those  among  owners  of  real  estate;  among  o^-ners  of 
personal  property;  between  individuals  and  corporations-  and 
among  corporations.     Their  principal  recommendations  ;re  a 
constitutional   amendment   to   permit    classification;   the   es- 
tablishment of  a  state  tax  board;  a  more  frequent  appraise- 

2l  nn  r-    "'•"'!'  '^'.  '"P"'"*^""  "^  ''^'^  ^"^1-^-1  revenues; 
and  publicity  in  taxation.     A  few  years  later  some  of  theii^ 

iri!fT^^/f "'.  were  adopted.    A  state  tax  commission  was 
established   the  decennial  real  estate  assessment  was  changed 

ZJ-JT      T}  ^'^^^^"^e"*'   ^«d   provision   was  made  for 
sending  to  each  taxpayer  a  printed  copy  of  the  real  estate  roll. 

^;1     M^'^^^^^'f^"^^^^  *^e  report  of  the  Louisiana  com- 
mittee.    They  were  forced,  we  are  told,  to  the  conclusion  that 

a  general  property  tax  system,  based  on  a  constitutional  re- 
quirement of  equality  and  uniformity,  is  vicious  and  leads  to 
the  grossest  inequalities  and  injustice.-  They  therefore  recom- 
mend a  constitutional  amendment  to  permit  classification-  the 
separation  of  state  from  local  taxation,  which  they  consider  a 

fundamental  prmciple';;  the  creation  of  a  permanent  tax 
commission;  the  exemption  of  mortgages;  the  imposition  of  a 
true  mheritance  tax;  the  taxation  of  salt,  sulphur,  petroleum 
and  gas  mines,  accordmg  to  gross  product;  the  separate  assess- 
ment of  land  and  improvements;  a  corporate  franchise  tax;  and 
a  cotton-future  stamp  tax.  Finally,  they  oppose  the  existing 
license  taxes.  Three  concurring  reports  are  made  bv  individual 
members;  one  on  home  rule  in  taxation;  another  on  the  taxation 

^  Report  of  the  Honorary  Commission  appointed  by  the  Governor  to  in 

Smbufl^r    rr"  ^^  ^^  ""^  r-^~^  IrnproveZZXlZ 
y.o lumbuh,  1908.     This  report  appeared  in  two  versions,  one  of  QP  nn 
including  a  letter  of  the  Governor,  and  one  of  64  dd    withn,?f  f^i=  i  F^'' 
^  Report  of  the  Tax  Commission  of  Louisiana.    Bato^^Cge^^^^^^ 


618 


ESSAYS  IN  TAXATION 


i> 


ij 


III. 


of  mortgages;  and  a  third  on  the  necessity  of  the  constitutional 
amendment.  It  would  be  difficult  to  find  in  any  other  recent 
report  so  much  valuable  information  packed  into  so  little  com- 
pass. 

Toward  the  end  of  the  year  appeared  the  reports  of  three 
more  New  England  states.  The  Vermont  commission  ^  begin  by 
assorting:  " undoubtedly  there  is  in  the  state  a  widespread  belief 
that  there  is  something  radically  wrong  with  our  present  system 
of  taxation."  They  declare,  however,  that  any  drastic  change 
in  the  system  should  be  attempted  only  after  a  more  thorough 
investigation.  Their  chief  reconmiendations  comprise:  a  tax 
commission;  the  separate  appraisal  of  land  and  buildings;  the 
abolition  of  the  power  to  offset  debts;  a  direct  inheritance 'tax; 
the  abandonment  of  the  distinction  in  the  treatment  of  shares  of 
domestic  and  foreign  corporations;  and  the  reduction  of  the 
savings  bank  tax.  One-half  of  the  commission  also  recommend 
the  adoption  of  the  Baltimore  plan.  A  minority  object  to  the 
flat-rate  plan,  and  recommend  a  graduated  income  tax. 

The  Maine  commission  2  tell  us  that  listing  laws  are  a  failure. 
They  consider  the  question  of  separation  of  state  and  local 
revenues,  but  conclude  that,  notwithstanding  its  advantages, 
"to  raise  all  our  revenue  by  taxing  franchises  would  tend  to 
extravagant  legislation."  They  prefer  a  taxation  of  corpora- 
tions on  the  ad  valorem  basis;  and  suggest  an  inheritance  tax,  a 
reduction  of  the  bank  tax,  and  an  abolition  of  the  retaliatory 
provisions  in  the  insurance  taxes.  They  welcome  the  adoption 
of  the  Baltimore  plan  for  the  taxation  of  mortgages,  and  warmly 
espouse  the  creation  of  a  permanent  tax  commission.  Finally, 
they  pay  some  attention  to  the  legal  problems  connected  with 
the  assessment  of  wild  lands  and  refuse  to  recommend  a  stump- 
age  tax  on  timber  lands. 

The  New  Hampshire  report  consists  of  two  bulky  volumes 

the  report  proper  and  an  appendix,  which  comprises  all  the  tax 
laws  from  1641  to  the  present.  ^  The  comim'ssion  point  out  that 
"  virtually  no  regard  whatever  is  paid  to  the  law  requiring 
sworn  inventories  to  be  returned  to  the  assessors."     Their 

*  Report  of  the  Commission  on  Taxation  of  the  State  of  Vermont  Mont- 
pelier,   1908.— 115  pp. 

*  Report  of  the  Maine  Tax  Commission.    Waterville,  1908.— 91  pp. 

»  Report  of  New  Hampshire  Tax  Comfnission  of  190S.  Concord,  1908. 
—326  pp.  A ppendix  to  Report  of  Tax  Commission  of  1908.  Taxation  in  New 
Hampshire.    Concord,  1908. — 300  pp. 


AMERICAN  REPORTS  ON  TAXATION  619 

te.„ptation  to  be  honest  held  out  to  the  Ss  o^Ma  l^L  «' 

ine  assessors    If  they  are  to  guess  at  all,  it  might  as  well  be  for 
the  larger  rate  as  for  the  smaller."    Thev  recommpnT  h. 

and  credits     They  propose  a  direct  inheritance  tax-  takp  ot 

suggest  a  tax  based  upon  a  capitalization  of  net  income  Tho 
poll  tax  they  th.nk,  ought  to  be  reformed  by  beSg  made  a  filed 
tax  instead  of  being  treated  as  a  part  of  the  proDertv  tax 

mS'  T""'  ^'^"^"*  '^  ^^'^  ^-  ^  permanTra^cl: 
Z  nf  tK         '''*■'■'"'  '■"P"''*  °"  '■'^"^^y  ^^''ation  is  written  bv 

'2  SLr trs  t:r  ^  '^  ^^^^"  *^^  -^-  -^ 

of  Hawau  are  of  course,  veiy  different  from  those  exE  on 
the  contment,  for  as  the  commission  point  out,  "indusTr  af  Ufe 
^  not  complicated  as  yet;  and  it  is  not  easy  ^  ev^e  taT^on 
personalty  nor  difficult  to  find  the  property  itself  "Th»  , 
problems  of  Hawaii  are  those  of  the  reTe Ste  tax  of  S  "  en 
terprise-for-profit"  tax,  and  of  the  income  tax      The  cor^" 

an    the  abolition  of  the  eight-year  rental  system,  whereby  the 

ntaf  v'ate'  OnTh"  Jr-I'^  ''  ''^''' '^^^  theTactfa 
Tomirof  the  r„  °*'^'.'>^"'^'  they  do  not  recommend  the 
profits  tax  F;n«n  •'".r^'^g  ".'«?«'  nor  of  the  enterprise-for- 
Ss  inTh.  Ir^'  I  •'onimssion  suggest  certain  amend- 
ments in  the  inheritance  tax  and  uphold  the  poll  tax  Th^  re 
port  IS  mterestmg  as  showing  the  influence  of  ecTomic  envf 
ronment  upon  fiscal  systems.  «ujnomic  envi- 

..ii"  If^:-  ^".^"i  ^^'"^  '■^PO''*^-    The  Delaware  commission  ^ 
call  attention  to  the  fact  that  the  state  has  a  systemTs™ 
tion  m  force.   But  the  dissatisfaction  is  still  pronoSe^    In  tte 

Honlt;  l^^r  pr^'^  "  '**  """""^  "f  "•'-''^'  J-e  30,  1908. 


II 


}A 


1 


i 


il 


620 


ESSAYS  IN  TAXATION 


first  place,  the  state  business  and  occupation  taxes  are  entirely 
too  crude.  The  commission  suggest  in  their  stead  the  Ontario 
business  assessments.  They  also  recommend  an  inheritance 
tax,  an  increase  of  the  license  tax,  and  the  securing  of  revenue 
from  the  oyster  beds.  In  theory  they  believe  the  fairest  tax 
would  be  that  upon  incomes  but  are  dubious  about  its  prac- 
ticability. Finally,  they  propose  the  creation  of  a  permanent 
tax  board.  A  series  of  appendices  gives  a  history  of  taxation  in 
Delaware  and  a  survey  of  the  existing  laws.  In  their  final 
report  of  the  next  year  ^  they  content  themselves  with  repeating 
most  of  their  previous  recommendations. 

The  Kentucky  commission  ^  was  divided  into  two  groups:  the 
Advisory  Commission,  to  make  recommendations,  and  the 
Tax  Commission,  to  frame  legislation.  The  commission  as  a 
whole  reported  that  the  Kentucky  system  is  inadequate  for 
four  reasons:  ''First,  it  does  not  produce  sufficient  revenue; 
second,  it  places  an  undue  portion  of  the  public  burden  on  some 
classes  of  property;  third,  it  has  resulted  in  driving  and  keep- 
ing from  the  state  a  large  amount  of  capital;  fourth,  it  produces 
evasion,  dishonesty  and  perjury,  encourages  contempt  for  the 
law  and  lowers  the  moral  standard  of  our  people."  The  recom- 
mendations are  a  constitutional  amendment  permitting  classi- 
fication; a  permanent  tax  commission  with  large  powers;  and 
the  separation  of  state  and  local  revenues. 

On  a  preceding  page  ^  we  called  attention  to  the  report  of 
the  Massachusetts  commission  of  1908.  The  Supreme  Court 
was  asked  whether  the  proposed  three-mill  tax  would  be  con- 
stitutional; and  when  they  reported  in  the  negative,  the  General 
Court  agreed  to  a  constitutional  amendment  to  permit  such 
classification.  Thereupon  a  special  conunission  was  appointed 
to  consider  the  question  and  the  arguments  on  either  side  were 
summed  up  by  Professor  Bullock  ^  and  Mr.  Matthews.'^    After 

»  Report  of  the  Delaware  State  Revenue  and  Taxation  Conmmsion.  Dover, 
1910.— 13  pp. 

2  Tax  Revision,  State  of  Kentucky,  Tax  Commission,  Advisory  Commission. 
Frankfort,  1909. — 45  pp. 

^  Supra,  p.  616. 

*  Argument  in  Favor  of  the  Proposed  Constitutional  Amendment  permitting 
the  General  Court  to  classify  Property  for  the  Purjxyses  of  Taxation.  By 
Charles  J.  Bullock  for  the  Taxation  Committee,  Boston  Chamber  of  Com- 
merce, October  26,  1909. — 58  pp. 

^  The  Proposed  Amendment  for  the  State  Constitution.  Argument  of  the 
Remonstrants.    By  Nathan  Matthews,  Boston,  1909. 


t\ 


AMERICAN  REPORTS  ON  TAXATION  621 

^a  nis  associates  the  commission  conclude  against  the  pronosi- 
tion.i  They  contend  that  "whatever  the  shortcon  iW ^^^^^ 
present  system  may  be,  the  evils  likely  to  be  produced  by  the 
proposed  remedy  would  })e  far  worse."  These  Sctllsthpv 
sum  up  .s  follows:  first,  the  three-mill  tax  woSd  tusTZ^^l 
disturbance  by  unsettling  values  and  encouraging  cS  to 
seek  foreign  investment;  second,  it  would  cause  fi^Sd^^^^ 

might  be  used  to  introduce  a  multitude  of  special  taxes  with 
various  rates,  thus  threatening  the  stability  of  values  fouTth 
the  desire  to  secure  legislative  favor,  in  the  form  of  reZced 
taxation  would  produce  constant  agitation;  fifth,  the  passage 
of  he  amendment  would  open  the  door  to'  the  ;nactmeTt  of 
unjust,  discrimmatmg  measures,  designed  to  penalize  Tealth 
Th.  report  was  sufficient  to  kill  the  movement  for  clSc': 

IV.  Municipal  Tax  Commissions 
Before  we  proceed  to  the  last  period  of  state  tax  reports  it 

reports.  The  municipal  reports  on  taxation  are  of  compara- 
t.vely  recen  date.  The  early  reports  =  have  been  refe3  to 
above.    By  the  opening  of  the  twentieth  centurj^  however  the 

Eronf  WV  '"  T  '^'■^^  "'''''  ~<^  ^-P-tan 
thTntv  ri„h  ^  TIV^""  committee  on  public  affairs  of 
the  City  Club  selected  the  municipal  revenue  system  as  the 
most  outstandmg  topic  to  be  studied,  and  Professor  Merriam 
was  chosen  to  undertake  the  investigation.  His  report  Tsom 
of  mterest  and  value.'    It  is  divided  into  four  parts   treL^^ 

smee  1871,  of  the  revenue  .systems  of  American  and  foreign 
cities;  of  the  present  revenues  of  Chicago;  and  of  some  eeS 
n'oToT'  of  reform.  The  report  is  clear.l^cinct  andTugS"  v" 
rcln"n  **"*?'"'"?  ^"  acute  analysis  of  present  evils,  but  also 
dLsclosing  a  familiarity  with  modem  literature.     The  field 

'lieml  of  the  Commission  appoinkd  under  the  Profisiom  of  Chanter  1li> 

*  Supra,  pp.  597  and  G07. 

rwi^'^/  '''?  /nmfi^a^ion  of  the  Municipal  Revenues  of  Chicano      Bv 
Charles  Edward  Merriam.    Chicago  City  Club,  1906.-161  pp 


4 


m 


I 


i- 


622 


ESSAYS  IN  TAXATION 


covered  is  so  broad  that  it  would  be  impossible  to  make  any 
mtelligent  comments  without  virtually  writing  a  treatise  on 
public  finance.  Suffice  it  to  say  that  this  report  gives  not  only 
an  admirable  systematic  survey  of  conditions  as  they  exist  but 
also  interesting  suggestions  for  improvement. 

In  New  York  the  situation  was  somewhat  better  than  in 
Chicago  because  of  differences  both  in  the  law  and  in  the  ad- 
mmistration.  But  here  also  many  complex  questions  led 
to  the  appointment,  in  1905,  of  an  advisory  commission  on 
taxation  and  finance.  The  commission  was  divided  into  three 
committees.  The  committee  on  taxation  and  revenue  made  a 
number  of  reports.  ^  Among  them  is  a  statistical  study  of  the 
municipal  revenues  of  London,  Paris  and  Berlin,  as  well  as  a 
report  on  uncollectible  taxes  and  the  abuses  that  have  arisen 
m  connection  with  the  issue  of  corporate  stock,  for  arrears  of 
taxation.  The  recommendations  of  the  committee  were  sub- 
s^uently  enacted  into  law.  The  chief  reports  deal  with  the 
administration  of  the  personal  property  tax,  which  is  shown 
to  be  a  complete  farce.  A  little  later  in  the  year  the  other  com- 
mittees on  the  city  debt  and  on  the  system  of  accounts  and 
statistics  made  their  reports. ^ 

It  was  found  impossible,  on  account  of  New  York's  enormous 
debt,  to  proceed  with  the  rapid  transit  schemes,  as  the  con- 
stitution limited  the  debt  to  ten  per  cent  of  the  assessed  valua- 
tion of  real  estate.  A  considerable  part  of  the  debt  was,  however 
only  nommal,  as  the  income  from  water  rates,  dock  rents  and 
subway  leases  were  more  than  sufficient  to  pay  the  interest 
The  commission  therefore  proposed  a  constitutional  amend- 
ment which,  while  exempting  from  the  terms  of  the  limitation 
bonds  issued  for  self-supporting  enterprises,  would  provide  a 

'Adtnsonj  Commission  on  Taxation  and  Finance,  Committee  on  Taxation 
and  Kevenue;  Reports  submitted  at  meeting  of  May  .9,  1905  (New  York  1905 
^1  ^?;ii:;^'^^T'  ""^  Mr.Purdy  on  the  Personal  Property  Tax,  1905  (New 
York  1J05.-31  pp.);  i26/x>rf  of  Commmittee  on  Taxation  and  Revenue, 
December  1900  (New  York,  1905.-37  pp.);  Report  of  Committee  on  Taxa- 
tion and  Revenue  on  Personal  Property  Taxation,  1907  (New  York  1907  -^ 
9  pp.).  '  ii^v/i. 

2  Adiisory  Commission  on  Taxation  and  Finance.    Report  on  the  City  Debt 
in  Us  Relation  to  the  Constitutional  Limit  of  Indebtedness.     Contairiing  a 

wriit"'il  "'  '"rf ''''"''  ^?  'i"^'"''^'  ^^^'-  'f  '^'  ^'^^'  ConstitJon, 
r,?!'  /  A7  ~^  /^^T  ^'^^:^''  ^^'  *^^'''''^  ""^  Accounts  and  Statistics  of  the 
CUy  of  New  York  June,  1907.-25  pp.  Rej^rt  of  Committee  on  Taxation, 
and  Revenue  on  Collection  of  Arrears  of  Real  Estate  Raxes  and  Assessments, 
Uec,   1907. — 33  pp.  * 


AMERICAN  REPORTS  ON  TAXATION  623 

nearly  automatic  plan  whereby,  should  such  an  enterprise  ever 
become  non-supporting,  the  bonds  issued  to  defrZto  c^st 
would  immediately  be  counted  in  estimating  the  deb  The 
report  on  the  collection  of  arrears  called  attention  to  the^^! 
adequacy  of  exwtmg  methods  aad  suggested  as  a  romp^v  th 
creafon  of  tax  liens  This  suggestion''ai;o Jik  'h  Sd  n« 
one  m  reference  to  the  debt,  soon  became  law.'  The  report  on 
statist.cs  and  accounts  was  not  so  far-reaching,  but  son  !  of 
the  suggestions  were  taken  up  independently  by  the  Bureau  of 
Municipal  Research,  which  subsequently  succeeded  in  revoln 

arortL^l'"ST  P""'^"^'  ^"'^  ^l^^  civf  methodtf 
accounting.    In  1908  the  commission  made  its  final  reoort "  in 

which  It  recounted  what  had  been  accomplished.         ^      ' 

ren^eS  'he  Ch.tr*"fn°'  ''*'"  ^"^'^  "^  P'-*!^'"^  was 
renaered  by  the  Chamber  of  Commerce,  through  its  committee 

on  state  and  municipal  taxation.     Beginninfw  th  tT^^ 

century,  there  appeared  in  rapid  succefsll  "Lly  .no,: 

tL  Von'' g'  H  V''°h  3  ''T'''^  "^"'^  '"^^  chairmathro 
i.L  *  H- ^<^ward.»  They  contain  an  account  of  the  ex- 
^tmg  system  of  taxation  in  New  York  but  are  not  quiteTn 
harmony  w.th  the  plan  of  Governor  Odell,  who  was  at  the  time 
seekmg  to  realize  the  project  of  an  indep;ndent  Source  of  reT 
enue  for  state  purposes.  During  the  next  few  years  the  tonic 
uppermost  m  public  discussion  was  the  taxation  Tf  !  ^ 
We  find  accordingly  several  reprts'SS'  t^jSt* 
In  the  preceding  pages  »  we  called  attention  to  the  nronosal  of 
the  committee  of  1900.    After  long  agitation,  a  law  w'i  ^nlct^' 

161  pf'""  ^""""'^'^  ««<'  ^'■»»«=-    Final  Report,  October,  1908.- 
>  Report  of  the  Committee  on  Slate  and  Municipal  Taxatim,  nf  ,h.  rh      i, 

,»•//  J  fv        ,  ^  P"  ^^-    Submitted  Mau  2,  1901 14  nn  n,^     v  u 

milted  December  6,  1901 4  pp  ^    '  ^*  PP-  ^^'    ^^' 

Record  Ta.    /902;  C/ofS  ct^or^TrZ  m'l^'!"^^:^'''' 
Plan  for  redudtia  Tnrnh'nn   lono.  »       ^       .1    J^  '  ^^^>  He  port  on  a 

ofNe.  York,  1903;  I^eLTt^TZll^oTMXt/'^^^e'Z^'"'' 
^  Supra,  p.  608. 


624 


ESSAYS  IN  TAXATION 


4 


i 


in  1905,  exempting  mortgages  from  the  property  tax,  assessing 
them  at  a  special  low  flat-rate  property  tax,  and  providing  for 
an  adequate  enforcement  of  the  new  measure.  This  led  to 
such  an  agitation  that,  in  1906,  the  annual  tax  was  replaced  by 
a  recording  tax.  The  reports  of  the  committee  of  the  Chamber 
of  Commerce  helped  to  bring  about  this  result. 

Of  perhaps  more  influence  in  securing  the  repeal  of  the  annual 
mortgage  tax  was  a  report  published  by  the  New  York  Tax 
Reform  Association,  and  prepared  by  the  secretary,  Mr.  Law- 
son  Purdy.*  In  order  to  settle  the  question,  Mr.  Purdy  selected 
certain  counties  in  New  York  and  adjoinijig  counties  in  Massa- 
chusetts, where  mortgages  have  been  exempted  from  taxation 
since  1881.  He  also  chose  certain  counties  in  Pennsylvania 
where  mortgages  are  taxed  under  a  separate  law.  Statistical 
tables  compiled  from  the  mortgage  records  showed  conclusively 
that  in  New  York  the  liability  to  possible  taxation  under  the 
old  law  (providing  for  a  tax  on  mortgages  as  a  part  of  the 
general  property  tax)  increased  the  rate  of  interest  by  a  mill 
and  a  half  in  some  counties  and  by  three  or  four  mills  in  others 
and  that  the  annual  mortgage  tax  of  1905  increased  the  rate  of 
interest  by  slightly  more  than  the  amount  of  the  tax.  It  may 
be  added  that  tables  prepared  after  the  repeal  of  the  annual 
tax  and  the  enforcement  of  the  recording  tax  showed  that  the 
rate  of  interest  had  again  proportionately  fallen.  This  cor- 
roboration of  the  general  theory  led  during  the  next  few  years 
to  the  adoption  of  the  mortgage  recording  tax  by  other 
states. 

One  of  the  reports  of  the  mayor's  commission  mentioned 
above  contained  a  recommendation  to  abandon  the  remaining 
vestiges  of  the  personal  property  tax  in  New  York  City. 
Mayor  Gaynor  had  no  sooner  assumed  office  than  he  espoused 
the  project.  A  committee  of  the  Chamber  of  Commerce  ^  felt 
constrained  to.  oppose  the  law  on  the  ground  that  it  ought  to 
be  applied  to  the  state  as  a  whole.     The  committee  of  the 

*  Mortgage  Taxation  and  Interest  Rates:  Abstracts  of  Mortgage  Records  in 
certain  counties  of  New  York,  Massachusetts  and  Penjisylvania,  illustrating 
the  Effect  of  the  new  annual  Mortgage  Tax  Law.  New  York  Tax  Reform 
Association,  1906. — 19  pp. 

2  Report  of  the  Committee  on  State  and  Municijml  Taxation  of  the  Chamber 
of  Commerce  on  the  Bill  to  amend  Section  4  of  the  Tax  Law  in  Relation  to  the 
Exemption  of  Personal  Property  from  Taxation.  May,  1910.  This  report 
is  also  printed  in  the  Monthly  Bulletin,  vol.  ii.,  no.  2,  of  the  Chamber  of 
Commerce,  pp.  20-32. 


■rm 


AMERICAN  REPORTS  ON  TAXATION  625 

Soth  il  tiH'^f "  ""  '^^  °*'>^^  ^'''"^  ^^^^'^  the  bill.. 
Although  It  fa  led  of  passage  by  a  narrow  majority  its  obiect 

was  accomphshed  in  part  by  the  enactment  of  ihesecuS 
debts  law  m  the  following  year.^  secured- 

While  the  taxation  of  personal  property  in  New  York  had 

f^Sorttnfr  ^-  '^'''^'y  committee,  of  which  Pro- 
fessor Hollander  was  chairman,  was  created  in  1907 '  The 
conditions  which  led  to  its  appointment  were  declared  to  be  the 
urgent  need  for  mcreased  revenues,  the  burdensome  cha  acter 
of  the  direct  property  tax,  and  the  inelasticity  in  the  other 
sources  of  mcome.  The  committee  recommended  that  additional 
revenues  be  secured  by  an  increase  in  the  liquor  licenses  and 

porattf  The"  "'  ^^  -T''  '^^""'''^^^  "^  public  sei^S  cor- 
E  de;i  Jw  *K  '  '"t^'*'"^  P'"^  °^  the  report  is  that 
r«lWl  R  t  ■  T'^""'*'  Pi-oPerty.     According  to  the  so- 

called  Baltimore  plan,  bonds  or  certificates  of  indebtedne^ 

are  t3T«  flT  "^^'Vl'"  ''''''  °^  ^'''^'-d  companfe 
Dian  fnlJoT       flat  mte  of  three  mills.     The  adoption  of  this 

1007    TV,  ,^,*,''  °7'""  °"®  hundred  and  fifty  millions  in 

1907.    This  remarkable  showing,  however,  by  no  means  blinded 

he  committee  to  the  defects  that  still  inhere  in  tl^e" stem  for 

r^tSroCiSruS'"^''  '^'^'^  '''''  "^"^^^  -- 

more  btdlv^'hi'r'S^h*'*'^  °u  ^''"^'"^  personalty  worked  far 

Twas  inSqs     TnTi.     '  ^"^'^  ^"^^  ^''^^^''y  '''^^  '"  1908  than 
It  was  m  1898.    In  the  same  way  we  are  told  that  the  net  assess- 

leu  from  forty-one  millions  m  1900  to  thirty-six  millions  in 

'  Report  of  the  Commilke  on  Finance  and  Taxation  nf  ih,   lf.„>,     ,  . 

property.    If  the  state  tax  was  not  paid,  the  owner  wis  l.qhloT^  personal 
recording  tax  to  all  bonds  and  mortgages  '^''''^"^'°°  «f  "i"  mortgage- 


026 


ESSAYS  IN  TAXATION 


I 


u 


i 


pi 


IM 


I 


lllf 


1908.  The  committee  therefore  advocate  the  creation  of  a 
State  Tax  Commissioner  and  a  better  organization  of  the  Ap- 
peal Tax  Court.  They  take  pains,  however,  to  disclaim  any 
"endeavor  to  drag  the  ponds  or  to  go  through  Baltimore  with 
a  fine-tooth  comb." 

The  Pittsburg  report  deserves  only  a  word,^  as  it  concerns 
itself  with  the  question  of  classification  of  real  estate.  Pitts- 
burg, as  is  well  known,  had  retained  the  primitive  classification 
into  city,  rural  and  agricultural  property.  The  committee  of 
1910  found  that  this  discrimination  penaUzed  the  business  in- 
terests and  the  small  householder,  and  that  it  encouraged 
speculation.  They  accordingly  opposed  the  whole  system  and 
recommended  the  introduction  of  a  bill  to  abolish  classification, 
and  to  provide  for  a  uniform  valuation  as  in  other  American 
cities.    These  recommendations  became  law  in  1911. 

Several  yeai-s  later,  we  find  another  Pittsburg  report.^  The 
early  years  of  the  second  decade  had  witnessed  a  movement  in 
favor  of  the  exemption  of  improvements  and  in  1913  the  so- 
called  graded  tax  law  was  adopted,  which  provided  for  a  re- 
duction every  two  or  three  years  of  10%  of  the  assessed  valu- 
tion  of  improvements  until  in  1925  they  should  be  assessed  at 
only  50%  of  their  value.  The  committee  recommended  a 
continuance  of  the  system,  but  proposed  also  the  abolition  of 
the  personal  property  tax  and  the  institution  of  a  graduated 
inheritance  tax  as  well  as  of  an  income  tax  to  be  levied  by  the 
state  with  a  share  going  to  the  city.  To  carry  out  such  a  pro- 
gram, a  state  tax  commission  was  suggested. 

In  the  meantime,  Cleveland  dealt  with  its  embarrassing 
local  situation.  The  report  ^  saw  the  way  out  of  the  difficulties 
partly  through  a  system  of  classification,  partly  through  a 
mortgage  recording  tax,  and  partly  through  an  independent 
state  revenue  from  corporations,  with  permission  to  the  cities 
to  levy  an  additional  increment  tax  on  land  values.  By  a  bare 
majority  of  one,  the  rather  numerous  commission  approved  of  a 
progressive  inheritance  tax  and  a  local  land-value  tax. 

*  Tax  Property  on  Full  Value.  Recommendation  for  Legislation  to  abolish 
Present  Classification  of  Property  for  Taxation  Purposes.  Report  of  Com- 
mittee on  Real  Estate  and  Taxation,  approved  by  Chamber  of  Commerce  of 
Pittsburg,  November  10,  1910.    Pittsburg,  1910.— 7  pp. 

*  Report  of  the  Committee  on  Taxation  Study  to  the  Council,  City  of  Pitts- 
burgh, 1916.— 105  pp. 

'  Report  of  the  Special  Tax  Commission  of  the  City  of  Clevelarui,  1915. — 
72  pp. 


AMERICAN  REPORTS  ON  TAXATION  627 

In  San  Francisco  the   problem  of  municipal  finance  was 
attacked  from  the  expenditure  side,  the  report  of  1915  i  Tie 

fouZ  t,  ^''^^i  f  *"^"*^^"'  ''^'^'^  -  the  customar^ 
tWh  ti!f  "'^\^''"  'T^^^  ^"^  «"^g^«ti"g  -  solution 
tSfnSf  '^  ''^T  ^"^  retrenchment.  The  adminis- 
trative pomt  of  view  is  also  apparent  in  the  report  of  the  Cam- 
bridge committee  ^  which  numbered  among  its  members  Prof^ 
sor  Bullocks  and  Spofford.  The  committee^ecommend  tL^^^^^^^^ 
assessors  be  appomted  rather  than  elected,  that  tax  maps  be 
prepared  and  that  a  civil  engineer  be  employed  to3are 
mathematical  rules  and  tables.  Prepare 

The  movement  in  favor  of  some  additional  burden  on  land 
values  reached  its  climax  in  New  York,  where  an  active  poliS 
program  m  favor  of  exemption  of  improvements  led  ?o  the 
orma  ion  of  the  Committee  on  Taxation  in  1914.    As  early  as 
1913  a  special  commission  ^  had  recommended  the  adoption 
of  an     unearned  increment"  tax.    Now  in  1916  a  much  larger 
commission,  of  the  executive  committee  of  which  the  presfnt 
writer  was  chairman,  made  an  elaborate  report  ^  accompanied 
by  three  reports  of  experts.^    The  conclusion,  which  was  d^ 
tT^ton^'r^r  ^^;P:«P^-^to  exempt  imp'rovements  from 
oX  r^^    V  \' w^T  ^"^'tus  upon  the  movement,  not 
only  m  New  York,  but  throughout  the  country.    As  a  result 
the  report  of  the  next  New  York  City  commisston,'  wS 
dealt  m  large  measure  with  purely  administrative  problems 
now  recommended  for  an  increase  of  city  revenues  a  genemi 
income  tax,  an  extension  of  the  so-caHed  Emerson  law  tTri 
corporations,  and  the  introduction  of  certain  special  taxes 

» California  State  Tax  Association.     The  Problem  of  Uinh  Tn^.     ■     q 
Francisco.     San  Francisco,  1915.-119  pp  ^      ^         ""''  '"^  '^"'^ 

.S7L?of/l/Z/t^^'//^T"^^^  ^'P'''  ^f^^Pecial  Committee  on 

,y  0/  the  Local  Real  Estate  Assessmerit  Situation,  1915.-14  pp 

rorii  submitted  to  the  Mayor.    January  11th,  1913.— 116  no 

-^39^Tp.^'''  "^'^"  ^"'^'^^'^'  "^  ^"^^^^■"'^  ^-^^^^  ^^'y  of^'^  York,  1916. 

uT'^^J'i,^^^  separate  reports  were  Excess  Condemnation  Rennrt  nf  th^  Cr^ 
rnUt^  of  Taxation^  the  City  of  New  York,  with  a  ^T^rt^rX^^ 

ThepTJV^  ^f  ^^^  ^"^^>«^  ^'^^^'    New  York,  f9r5t-n7  pp 
fhe  Exemption  of  Improvements  from  Taxation  in  Canada  and  theUn^^Jl 
States     A  Report  by  Robert  Murray  Haig.     New  York  19^-!2?4  nn     7 

oj  lyimv  ror/c.   A  Report  by  Robert  Murray  Haig.    New  York  101  ^  — 9^^^  r./ 


nil 

m 


628 


ESSAYS  IN  TAXATION 


i» 


The  last  of  the  municipal  reports  of  the  period  is  that  of  Winni- 
peg.^ The  experiment  with  the  so-called  single  tax  in  Canada 
having  turned  out  rather  disastrously,  the  board  of  valuation 
reported  that  it  had  now  become  necessary  to  diminish,  rather 
than  to  augment,  the  burden  on  real  estate.  Their  conclusions 
were  summed  up  in  a  recommendation  to  convert  the  old  busi- 
ness tax,  which  had  been  levied  as  a  substitute  for  the  personal 
property  tax  since  1893,  into  an  income  tax. 


3 


I 


I! 


m 


11 


V.  The  Penod  1910-1921 

Reverting  now  to  the  special  state  tax  commissions,  we  come 
to  the  last  decade,  which  witnessed  some  notable  changes  in 
general  attitude.  The  year  1910  opened  with  a  series  of  reports 
from  Rhode  Island.  The  committee,  finding  conditions  most 
unsatisfactory,  -  recommend  the  establishment  of  some  form 
of  effective  state  supervision;  a  classification  of  property  with 
a  low  flat  rate  on  certain  forms  of  intangibles;  a  reform  of  the 
corporation  tax  law  (Rhode  Island  being  one  of  the  few  states 
which  still  clung  to  the  primitive  method  of  the  general  property 
tax  as  applied  to  corporations) ;  provision  for  an  independent 
state  revenue  from  corporations,  and  inheritances;  and  a  sep- 
arate assessment  of  land  and  improvements.  Two  valuable 
appendices  contain  an  account  of  the  system  of  tax  super- 
vision and  a  survey  of  the  corporation  tax  in  the  most  important 
states.  In  their  second  report  ^  of  the  following  year  the  com- 
mittee call  attention  to  the  fact  ''that  the  general  property  tax 
stands  to-day  discredited  even  more  conclusively  than  a  year 
ago."  They  had  in  the  meantime  investigated  the  workings  of 
centralization  in  Wisconsin  and  Minnesota,  and  approve  of  it 
even  more  thoroughly  than  before.  An  appendix  contains  all 
the  important  changes  in  the  tax  laws  of  the  various  states 
during  1909  and  1910. 

Somewhat  later  in  the  year  the  committee  made  another 
report  ^  extending  its  recommendation  for  a  tax  on  the  cor- 

*  City  of  Winnipeg.  Report  of  the  Board  of  Valuation  and  Revision  on 
Systems  of  Assessment  and  Taxation,  1917. — 75  pp. 

2  State  of  Rhode  Island  and  Providence  Plantations.  Report  of  the  Joint 
Special  Committee  on  the  Taxation  Laws  of  Rhode  Island.  Providence, 
1910.— 183  pp. 

'  Second  Report  of  the  Joint  Special  Committee  on  the  Taxation  Laws  of 
the  State  of  Rhode  Island.     Providence,  1911. — 98  pp. 

*  Special  Report  of  the  Joint  Special  Committee  on  the  Taxaiion  Laws  of 


A 


AMERICAN  REPORTS  ON  TAXATION  629 

porate  excess  to  virtually  all  corporations.  This  recommenda- 
tion was  earned  out  by  the  legislature  early  in  the  next  year  ' 
Dunng  the  early  weeks  of  the  year  1910,  there  appeared  two 
noteworthy  reports.  The  IlUnois  commission  was  significant 
m  countmg  among  its  members  and  advisers  scholars  hke 
msident  James  and  Professors  Merriam,  Kinley  and  Fairlie 
The  report  is  a  short  one.^  But  the  material  consists  of  two 
large  volumes;  one  comprising  an  account  of  the  Illinois  system 
by  Professor  Fairhe  Hhe  other  including  a  compilation  of  tax 
laws  and  decisions.^ 

Professor  Fairlie's  report  is  a  real  treatise  on  taxation  Es- 
pecially noteworthy  are  the  discussions  of  the  undervaluation 
ot  real  estate,  the  assessment  of  mortgages,  the  taxation  of 
corporations  including  an  account  of  the  Teachers'  Federation 
cases,  and  the  subject  of  special  taxes  and  fees.  A  chapter  is 
devoted  to  a  survey  of  the  corporation  tax  in  some  six  or  eight 
typical  states  in  this  country.  On  the  basis  of  the  conclusions 
reached  by  Professor  Fairlie,  the  commission  present  its  recom- 
mendations for  a  constitutional  amendment  permitting  ex- 
ceptions to  the  rule  of  uniformity;  the  appointment  of  a  state 
tax  commission;  and  the  substitution  of  county  for  local  as- 
sessors. 

Pennsylvania,  which  had  in  some  respects  been  in  advance 
ot  the  other,  states  decided  to  reconsider  its  system  in  the  same 
year.  After  a  preliminary  report  in  1910,  a  full  report  was. 
issued  m  Wll.'-  The  committee  hold,  that  the  existing  separa- 
tion of  taxation  as  between  state  and  localities  "is  an  admirable 
feature  which   should   be  preserved."     They  recommend  a 

f^  State  of  Rhode  Island  lo  His  ExceUency  the  Governor.    Providence  1911 

OO    pp.  '    AC'xx. 

^Cf.  supra,  p.  209. 

2  Special  Message  of  Charles  S.  Deneen,  Governor,  to  the  General  Assembly 
transmutzng  the  Report  of  the  Special  Tax  Commission.    sSfidrrgil 

OO  pp.  ' 

!  ^  ^^P/^r^///^f  Taxation  and  Revenm  System  of  Illinois.  By  John  A 
Fairlie,  Chief  Clerk  of  the  Commission.     1910.-255  pp 

*Compihtion  of  Tax  Laws  and  Judicial  Decisions  of  the  State  of  Illinois 
made  hy  AWert  M.  Kales  and  Elmer  M.  Liessmann,  inder  the  IZT^ 
the  Sjyecial  Tax  Co7nmission.    Springfield,  1911.-273  pp 

^^port.  The  Joint  Committee  of  the  Senate  and  Home  of  Rejn-esentatives 
of  the  CommonweaUh  of  Pennsylvania  to  confer  and  report  upon  a  Revision 
^  the  Corporation  and  Revenue  Laws  of  the  Commonwealth  to  the  Legislature 


630 


H 


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ESSAYS  IN  TAXATION 


graduated  inheritance  tax;  a  flat  tax  on  anthracite  coal;  an  ex- 
tension of  the  mercantile  license  taxes,  and  a  repeal  of  certain 
exemptions.  They  put  themselves  on  record  as  against  the 
proposal  to  return  to  a  local  personal  property  tax,  and  think 
that  the  system  of  a  flat  rate  on  securities  works  well.  They 
incline  to  the  opinion  that  an  increased  centralization  may 
accomplish  good  results,  but  reserve  their  decision. 

A  little  later  in  the  year  appeared  the  report  of  the  Virginia 
commission.*  The  commission  posit  as  an  ideal  the  separation 
of  state  and  local  revenues,  but  favor  for  certain  practical 
reasons  only  a  partial  separation  for  the  present.  Of  more 
immediate  importance  they  consider  a  centralized  permanent 
tax  commission  to  take  charge  of  the  income  tax,  the  failure  of 
which  under  present  conditions  they  acknowledge.  Further- 
more, they  recommend  a  low-rate  tax  on  securities  and  as  to 
corporations,  they  think  a  gross  earnings  tax  preferable  to  the 
ad  valorem  system.  The  report  is  based  on  a  number  of  separate 
studies  submitted  by  the  efficient  secretary,  Mr.  Douglas  S. 
Freeman,  which  cover  a  great  variety  of  points. 

The  last  of  the  reports  that  appeared  during  the  year  was 
that  of  the  Michigan  conamission  of  three,  including  Professor 
Henry  C.  Adams.  A  preliminary  report  was  made  in  October  ^ 
and  the  final  report  was  published  before  the  end  of  the  year  ^ 
The  commission  recommend  the  separation  of  state  and  local 
revenues,  although  they  recognize  the  fact  that  the  project 
may  not  approve  itself  to  the  legislature.  They  therefore  ad- 
vance an  alternative  plan,  the  main  feature  of  which  is  the 
application  to  corporations  of  the  Massachusetts  corporate- 
excess  method.  In  addition,  they  suggest  an  increase  of  the 
inheritance  tax,  the  taxation  of  interurban  railway  and  of  water 
power  companies,  and  the  adoption  of  the  New  York  secured- 
debts  tax  method,  but  at  an  annual  rate.  They  do  not  favor 
the  direct  income  tax.  Finally,  they  declare  themselves  satis- 
fied with  the  present  ad  valorem  tax  on  railroads,  and  believe 
that  these  corporations  should  not  complain  even  if  they  are 
taxed  at  a  higher  rate  than  other  persons. 

»  Report  to  the  General  Assembly  of  Virginia  by  the  Tax  Commission  ap- 
pointed to  make  an  Investigation  of  the  System  of  Assessment,  Revenue  and 
Taxation  now  in  force  in  this  State.    Richmond,  1911. — 369  pp. 

2  Preliminary  Report  of  the  Commission  of  Inquiry  into  Taxation  of  the 
State  of  Michigan,  1911. — 37  pp. 

'  Report  of  Commission  of  Inquiry  into  Taxalian,  Michigan.  Lansing. 
1911.— 53  pp. 


AMERICAN  REPORTS  ON  TAXATION  631 

The  year  1912  witnessed  a  sUght  lessening  of  activities.  The 
Iowa  commission,  1  basing  their  conclusions  on  a  comparative 
study,  report  strongly  against  the  reintroduction  of  the  tax 
ferret  system.  Although  Iowa  had  just  put  in  force  the  flat 
mill  rate  for  secunties,  the  commission  report  that  the  svstem 
worked  badly  because  of  local  assessment.  They  therefore 
recommend  a  state  tax  commission.  They  declare  themselves 
as  impressed  with  the  advantages  of  at  least  a  partial  separa- 
tion of  sources  and  urge  that  this  be  studied  by  the  permanent 
commission.  They  state,  in  conclusion,  that  Iowa  is  not  yet 
ready  for  either  a  direct  inheritance  or  an  income  tax,  but  believe 
that  the  tune  is  not  far  distant  when  such  changes  may  be 
mtroduced  with  advantage. 

The  Florida  commission  content  themselves  ^  with  recom- 
mendmg  the  separation  of  sources  as  well  as  classification,  and 
present  several  bills  designed  to  carry  their  recommendations 
mto  effect.  Finally,  it  is  to  be  noted  that  the  taxation  of  forests 
Had  assumed  such  importance  in  the  northeastern  states  that  a 
special  Connecticut  commission  submitted  a  report  ^  which 
culmmated  m  the  recommendation  that  yield,  rather  than 
property,  serve  as  the  basis  of  taxation.  A  similar  conclusion 
was  reached  by  the  Massachusetts  commission  which  re- 
ported a  httle  later.^ 

In  1913  New  Jersey  led  off  with  a  report '  which  strongly 
recommends  a  permanent  state  tax  commission,  to  assess 
public  utihties  and  to  supervise  the  local  officials.  The  report 
makes  certam  minor  recommendations  such  as  the  abolition 
ot  the  poll  tax  and  then  goes  on  to  consider  a  revision  of  the 
tundamental  basis  of  taxation.  They  recommend  the  exemp- 
tion of  personal  property  but  suggest  that,  if  this  be  considered 
too  radical,  at  least  the  system  of  classification  be  introduced 
Ihey  propose  a  revision  of  the  inheritance  tax  as  well  as  of 
the  corporation  tax  and  recommend  a  business  tax  to  take  the 
place  of  the  personal  property  tax.    As  to  the  income  tax,  they 

Moi^n9f2-156^"^  ^''''  ^'''^'^^'^''  ^  ^^'  ^^'^^^  of  I(ywa.    Des 

2  ^poH  of  the  Tax  Commission.    Tallahassee,  Fla.  (1912)  —55  pp 
1912    '^  0/  the  Special  Commission  on  Taxation  of  Woodland.    Hartford, 

BosSn[914  ^gg^^'"'^^^'*  ^'^  ^^^  Taxation  of  Wild  or  Forest  Lands 

/Report  of  the  Commission  to  Investigate  the  Tax  Assessments  in  the  State 
of  New  Jersey.     Trenton,   1913.— 64  pp. 


ihj 


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632 


ESSAYS  IN  TAXATION 


are  not  quite  sure  as  to  whether  public  opinion  is  prepared  for 
such  a  step. 

Much  the  same  ideas  are  found  in  the  Utah  commission.  A 
preUminary  report  of  1912,i  after  considering  the  breakdown 
of  the  personal  property  tax,  recommends  a  low-rate  tax  on 
intangibles  and  the  abolition  of  the  poll  tax.  While  the  com- 
mission agree  that  an  income  tax  may  be  desirable  in  the  future, 
they  suggest  for  the  present  a  graduated  inheritance  tax.  They 
are,  however,  not  much  impressed  with  the  arguments  for 
separation.  As  a  result  of  their  suggestions,  a  constitutional 
amendment  was  submitted  to  the  voters,  but  was  defeated  at 
the  polls.  The  final  report,^  therefore,  confessing  that  there  is 
no  hope  for  the  solution  of  the  tax  difficulties,  contents  itself 
with  repeating  the  suggestions  for  the  inheritance  and  poll 
tax  and  with  recommending  certain  minor  changes. 

Much  more  elaborate  is  the  report  of  the  Maryland  Com- 
mission.3  After  considering  a  number  of  lesser  matters  and 
recommending  a  direct  inheritance  as  well  as  a  franchise  tax, 
the  commission  discusses  the  so-called  Baltimore  plan.  They 
find  the  situation  unsatisfactory,  chiefly  because  of  the  method 
of  local  assessments,  and  put  in  the  forefront  of  their  recom- 
mendations a  permanent  tax  commission.  They  favor  a  partial 
separation  of  sources  and  suggest  a  waiting  attitude  in  respect 
to  the  income  tax.  The  same  year  is  marked  by  the  appearance 
of  an  excellent  Connecticut  report  on  the  corporation  tax  * 
which,  after  giving  an  account  of  the  development  of  the  law 
and  a  survey  of  the  system  in  other  states,  recommends  the 
taxation  of  public  service  corporations  on  gross  receipts  and 
that  of  other  corporations  on  a  slightly  different  basis. 

Kentucky  was  so  dissatisfied  with  its  system  that  the  special 
tax  commission  engaged  as  expert  Professor  Plehn  of  California. 
A  preliminary  report  ^  followed  Professor  Plehn  in  discounte- 
ancing  the  adoption  of  separation  because  of  the  fact  that 
**the  main  reasons  for  the  introduction  of  that  system  in  Cali- 

»  Preliminary  RepoH  of  the  Board  of  Comjnissioners  on  Revenue  and  Taxa- 
tion for  the  State  of  Utah.    Salt  Lake  City,  1912. — 46  pp. 

2  Final  Report  of  the  Board  of  Cmnmissioners  on  Revenue  and  Taxation 
for  the  State  of  Utah.    Salt  Lake  City,  1913.— 232  pp. 

3  Rej)ort  of  the  Commission  for  the  Revision  of  the  Taxation  System  of  the 
State  of  Maryland  and  City  of  Baltimore.    Baltimore,  1913. — 445  pp. 

*  Report  of  the  Special  Commission  on  Taxation  of  Corporations  paying 
Taxes  to  the  State.     Hartford,  1913.— 238  pp. 
6  Preliminary  Report  of  the  Special  Tax  Commission.    Frankfort,  1913. 


AMERICAN  REPORTS  ON  TAXATION  633 

fornia,  do  not  exist  in  Kentucky."  The  commission  hold  that 
in  view  of  actual  local  conditions  classification  is  preferable, 
m  the  final  report  the  commission  work  out  the  details  of  such  a 
system  and  recommend  a  permanent  tax  commission.  They  also 
believe  that  Kentucky  is  not  yet  ready  for  an  income  tax. 

Similar  ideas  are  found  in  the  report  of  the  Nebraska  ^ 
commission,  who  recommend  a  constitutional  amendment 
designed  to  permit  of  classification.  They  shape  their  sugges- 
tions however,  in  an  alternative  way.  In  case  the  amendment 
snoulcl  not  be  adopted,  they  suggest  a  pennanent  tax  com- 
mission, a  change  in  the  inheritance  tax,  the  taxation  of  cor- 
porations on  franchise  values,  and  the  abolition  of  the  system 
of  fractional  assessments.  If,  however,  the  constitutional 
amendment  should  prevail,  they  propose  a  detailed  system  of 
classified  taxes  and  suggest  that  the  new  Board  studv  the 
problem  of  the  income  tax. 

The  Virginia  commission  had  as  a  member  Professor  Thomas 
VV .  Page.  Its  report '  is,  as  a  consequence,  noteworthy.  Basing 
Itself  m  part  of  the  conclusions  of  a  conference  held  at  Rich- 
mond and  takmg  advantage  of  suggestions  for  introducing 
the  system  of  segregation  worked  out  by  the  State  Auditor ' 
the  commission  discuss  the  need  of  tax  maps  in  the  assessment 
ot  real  estate  and  urge  a  permanent  tax  commission.  They 
believe  m  the  principle  of  classification  but  also  in  partial  seg- 
regation. Inasmuch  as  Virginia  already  possesses  an  income 
tax  they  suggest  a  redrafting  of  the  law  designed  to  secure 
better  administration  and  more  justice.  Finally,  they  maintain 
that  a  direct  inheritance  tax  is  not  at  this  time  needed.  The  ad- 
ministrative problem  is  also  attacked  in  another  Illinois  report « 

fort^^mV"^  ^^^  ^^^"^^  ^"""^  Co/Aimmion  of  Ke?itucky,  1912-14.     Frank- 

TL^Z:'{^,t!tl^  ^  ^^  '''  '^^-'^^  ^----  -  ^—  ^nd 

'Report  of  the  Joint  Committee  on  Tax  Revision.     Richmond    1914  — 
JMii  pp.  ' 

nf  *ffnfT^^T'  %  %^ff''^\'Z^eld  to  consider  the  Question  of  Tax  Reform 
^ofj      «o  '  Richmond,  Va.,  January  20th  and  21st,  1914.    Richmond 

-iyi4. — bo  pp.  ' 

^  Tentative  Plan  for  segregating  the  Subjects  of  Taxation  jwesented  by  C. 

^'f^.T'J     T^'^I'^^r  ^'''''''^  ^^^^^^'  12  pp.    Report  of  the  Efforts 
of  the  Audtior  of  Public  Accounts  to  enforce  a  Compliance  with  the  Tax 

t°r  /   r'rr'     !^^'^^'''  """^V!"^  Tentative  Plan  for  the  Segregation  of  the 
Subjects  of  Taxation  proposed  by  the  Auditor.     (1914).— 89  pp. 

•il  Report  on  Revenue  and  Finance  Administration'  By  John  A.  Fairlie, 


11 


634 


ESSAYS  IN  TAXATION 


)n 


hi 
I'll 


prepared  by  Professor  Fairlie,  which  entei"s  into  the  details  of 
fiscal  administration  and  culminates  in  a  recommendation  for 
a  central  state  commission. 

The  year  1915  is  marked  by  only  two  reports.  The  Tennessee 
committee  ^  think  that  a  change  of  the  constitution  is  necessary 
as  a  preliminary  to  all  reform,  but  urge  the  appointment  of  a 
central  state  tax  commission.  So  far  as  intangible  personalty  is 
concerned,  they  recommend  a  ten  per  cent  income  tax  on  securities 
in  preference  to  the  present  system.  In  Georgia  the  impetus  to 
tax  reform  was  given  by  the  Athens  Chamber  of  Commerce  a 
committee  of  which  made  a  series  of  succinct  recommendations 
including  separation,  classification,  apportionment  according 
to  expenditure,  an  inheritance  tax,  and  a  permanent  tax  com- 
mission.^ 

The  year  1916  witnessed  great  activity.  The  New  York 
coimnittee  ^  which  enjoyed  the  services  as  secretary  of  Professor 
H.  A.  E.  Chandler  of  Columlna,  discusses  the  failure  of  the 
personal  property  tax  and  finds  no  merits  of  the  listing  system. 
Much  attention  is  paid  also  to  the  unsatisfactory  system  of 
taxing  corporations.  The  conclusion  is  that  classification 
affords  no  remedy  for  the  New  York  situation  and  that  what 
is  needed  is  an  income  tax  applicable  to  individuals  and  cor- 
porations alike.  The  administrative  features  of  such  an  in- 
come tax  law  are  discussed  in  detail  and  the  draft  of  a  bill  is 
appended.  The  minority  report  ^  agrees  as  to  the  unsuitability 
of  classification  but  prefei-s  a  habitation  tax  to  the  direct  in- 
come tax. 

The  movement  in  favor  of  an  income  tax  had  in  the  mean- 
time made  such  progress  in  Massachusetts  that  a  special  com- 
mission was  appointed  to  draft  a  bill  to  that  effect.  The  report 
of  the  commission  ^  works  out  the  details  of  such  a  plan  so  far 
as  concerns  incomes  from  securities  and  from  personal  exer- 

Prepared  for  the  Efficiency  and  Economy  Committee  created  under  the  Au- 
thority of  the  48th  General  Assembly.    State  of  Illinois.     (1914).— 103  pp. 

*  Report  of  Committee  to  Investigate  Assessment  and  Taxation  in  the  State 
of  Tennessee.     Nashville,   1915. — 108  pp. 

2  The  Athens  Plan.  Report  of  Committee  mi  Tax  Remsion.  Athens, 
Georgia  (1915).— 16  pp. 

^  Report  of  the  Joint  Legislative  Committee  on  Taxation  in  the  State  of 
New  York.    Albany,  1916.— 295  pp. 

*  Minority  report  of  the  Joint  Legislative  Committee  on  Taxation.  Albany, 
1916.-^7  pp. 

'  Report  of  the  Special  Commission  mi  Taxation.    Boston,  1916. — 126  pp. 


AMERICAN  REPORTS  ON  TAXATION  635 

tions  and  suggests  an  increase  of  the  powers  of  the  tax  com- 
missioner. The  commission  also  discuss  the  distribution  of 
revenues  as  between  the  state  and  localities.  In  contradistinc- 
tion to  the  New  York  report,  however,  they  declare  themselves 
as  not  yet  entirely  convinced  as  to  the  advisabihty  of  apply- 
ing the  mcome  tax  to  corporations.  The  consequence  was 
that  while  m  New  York  the  corporate  income  tax  preceded 
the  personal  mcome  tax  by  two  years,  in  Massachusetts  the 
.  reverse  was  true. 

The  New  Hampshire  Report '  limited  itself  substantially 
to  a  discussion  of  the  inheritance  tax,  the  history  of  which  is 
traced  m  detail,  together  with  a  comparative  table.    The  result 
of  the  recommendation  was  the  adoption  by  Rhode  Island  of 
an  mhentance  tax  not  only  on  estates  but  also  on  shares     The 
Indiana  commission  ^  although  characterizing  the  prevalent 
method  as  a  ''legalized  system  of  robbery"  content  themselves 
with  recommending  a  peimanent  Board  of  Tax  Control    to- 
gether with  a  limitation  of  tax  rates.    They  refuse  to  consider 
either  classification  or  the  income  tax,  because  of  constitutional 
difficulties.    More  deserving  of  attention  is  the  minority  report 
of  Professor  Rawles,  who  proposes  a  constitutional  amendment 
with  suggestions  along  the  fine  of  both  classification  and  income 
taxation.  ^   The  Kentucky  Commission,  taking  advantage  of 
the  constitutional  amendment  adopted  as  a  result  of  the  labors 
of  the  special  commission  two  years  before,  submitted  a  re- 
port^ working  out  the  details  of  the  classified  property  tax 
which  had  now  become  possible  and  providing  for  a  modified 
separation  of  sources.    Both  of  these  plans  were  soon  adopted  by 
the  legislature.^     Of  somewhat  less  importance  is  the  Virginia 
report  ^  which  in  addition  to  making  various  minor  suggestions 
states  that  'Hhe  system  of  partial  segregation  of  the  subjects 

1  Special  Report  of  the  Board  of  Tax  Commissioners  tnade  to  the  Governor 
on  New  Sources  of  Revenue.     Providence,  1916.— 68  pp. 

2  Report  of  the  Commission  on  Taxation  to  the  Governor.  Fort  Wavne 
1916. — ^xlv,  408  pp.  ^ 

^Report  of  the  Kentucky  Tax  Commission.     Frankfort,   1916  —42  pp 
This  was  based  in  part  on  the  monograph  Taxation  of  Real  Estate  and 
Personal  Property  in  Kentucky.    Address  to  the  Kentucky  Tax  Commission 
from  the  State  Tax  League.     (1916).— 80  pp. 

'•The  beneficial  results  of  the  change  are  explained  in  Brief  on  the  Sub- 
ject of  Classification  and  Separation  of  Property  for  Taxation.  Submitted 
to  P.  N.  Clarke,  Secretary  Committee  on  Tax  Reform  representing  the 
btate  Tax  League.     Louisville,  1917.-24  pp. 

^Report  of  {Va.)  State  Advisory  Board  on  Taxation  (1916).— 31  pp. 


I  H  < 


636 


ESSAYS  IN  TAXATION 


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Vnf 


of  taxation  now  in  force  is  generally  satisfactory."  Finally, 
it  may  be  mentioned  that  the  same  year  marked  the  report  of 
the  Hawaii  Commission/  the  chief  recommendations  being  a 
graduated  inheritance  tax,  new  stamp  taxes,  an  amendment  of 
the  income  tax  and  the  adoption  of  the  Somers  system  in  the 
assessment  of  real  estate.  The  commission  also  suggest  the 
abolition  of  the  assessment  of  leasehold  interests. 

The  year  1917  is  marked  by  two  reports.  The  California 
commission  ~  was  much  influenced  by  the  movement  in  favor 
of  some  increase  in  the  taxation  of  land  values.  Basing  them- 
selves largely  on  Professor  Plehn's  study  of  the  English  land 
taxes,  they  recommend  a  constitutional  amendment  au- 
thorizing a  tax  on  the  future  increment  of  land  values.  Perhaps 
the  most  significant  part  of  the  report,  however,  is  the  sugges- 
tion that  l)efore  long  a  state  income  tax  would  be  desirable. 
The  Connecticut  report  ^  presents  a  review  of  the  tax  system 
as  it  had  developed  since  the  introduction  of  the  business  or 
income  tax  on  corporations.  The  commission  consider  the 
possible  introduction  of  a  direct  or  indirect  income  tax  on 
individuals,  but  decide  on  the  whole  to  content  themselves 
with  less  radical  suggestions.  On  the  other  hand,  the  com- 
mittee of  the  Connecticut  Chamber  of  Commerce,  basing 
themselves  largely  on  a  special  report  made  for  them  by  Pro- 
fessors Fairchild  and  Walradt,  declare  ^  that  the  Connecticut 
system  of  taxing  intangibles  is  unsuccessful  and  recommend 
the  introduction  of  a  personal  income  tax. 

In  1918  the  movement  of  reform  spread  to  the  Southern 
states.  The  Mississippi  committee,^  realizing  the  difficulty  of 
putting  through  radical  suggestions  of  a  centralized  tax  ad- 
ministration, content  themselves  with  a  compromise,  but 
suggest  a  gradual  modification  of  the  privilege  taxes,  a  cen- 
tralization of  the  unsuccessful  income  tax,  and  the  adoption 

1  Report  of  the  Special  Commission  on  Taxation  for  the  Territory  of  Hawaii 
Honolulu,  1916.— 12  pp. 

2  Report  of  the  State  Tax  Commission  of  the  State  of  California.  Sacra- 
mento, 1917.— 280  pp. 

'  Report  of  the  Special  State  Commission  on  the  Subject  of  Taxation  New 
Haven,   1917.— 44  pp.  •'  .    • 

*  Report  of  the  Joint  Committee  on  Taxation  on  State  Finance  to  the  Con- 
necticut Chamber  of  Commerce  embracing  the  Report  of  a  Sjjecial  Study  of  the 
Connecticut  Tax  System.    New  Haven,  1917.— 67  pp. 

*  Mississippi  Legislature,  1916-18.    Joint  Reoort  of  the  Senate  and  House 
Committee  a  pointed  to  consider  the  State's  Revenue  System  in  Fiscal  A  ifairs 
Jackson,  1918.— 63  pp.  •  '^       ' 


AMERICAN  REPORTS  ON  TAXATION  637 

of  a  progressive  inheritance  tax.    The  Georgia  report '  recoeniz- 
mg  the  failure  of  the  general  property  tax,  joined'to  the  pr^ 

he  creadonTn  T"  '^'  '^"P'""  "^  classification  as  we'l  as 
the  creation  of  both  an  mcome  tax  and  an  inheritance  tax.  The 
Louisiana  report  ^  is  less  drastic  and  limited  itself  to  the  recom! 
mendation  of  an  inheritance  tax  and  the  extension  of  the 

was  loud  ':X^^^P-f  ^--  I-  Montana  also  the  discontent 
was  loud,  and  a  special  commission  reported  '  in  favor  of  a 
pernianent  tax  commission,  classification,  the  exemption  of 
mortgages  and  a  reform  of  corporate  taxation.  The  report 
of  the  Massachusetts  joint  coimnittee  ^  dealt  primarily  with 
a  budget  system  and  recommended  the  adoption  of  the  pav- 
as-you-go  policy.  ^  ^^^^ 

rJ^t  IT  ^^^^/^^  redoubled  activities.    The  Ma„ssachusetts 
tTrtenrr^  two  points-^a  better  method  of  distributing 
the  revenue  from  the  mcome  tax  and  the  extension  of  the  in- 
come tax  to  corporations.    The  Ohio  committee,  which  enioved 
the  assistance  of  Professor  Lutz,  submitted  a  report «  recom- 
mending  a  graduated  inheritance  tax,  an  income  tax,  and  the 
limitation  of  local  indebtedness.    Perhaps  the  most  noteworthy 
publications  of  the  year,  however,  were  the  Canadian  reports 
Most  of  the  western  provinces  and  municipalities  had  gotten 
into  trouble  through  the  exemption  of  improvements  from 
taxation.    British  Columbia  issued  several  reports  '  culminating 
n  the  suggestion  of  an  mcome  tax.    This  was  based  largely  on 
the  findmgs  of  Professor  Haig,  of  Columbia,  who  had  also  made 
a  prehmmary  report  on  Saskatchewan. «     Similar  expert  as- 

»  Report  of  the  Special  Tax  Commission  for  Georgia.  Atlanta.  1919.-88  pp 
^ Legislative  Recommendations  made  by  the  Board  of  State  Affai^to^he 
General  Assembly  of  Louisiana.    Baton  Rouge,  1918  —37  nn 

E:Z!^z.'^trli^  "Snt'^rp;"—"^^^^^^^ '-  ^^^"^-^  '-^'  ^f 

huff'^^  r/^^^i  n'^'''''  """^  ^^'  ^^^^^'  submitted  to  the  General  CouH 
b^t^^nt^Speaal  Committee  on  Finance  and  Budget  Procedure.    Bosto^ 

^^^Report  of  the  Joint  Special  Committee  on  Taxation.    Boston,  1919.— 

« Report  of  the  Special  Joint  Taxation  CommUtee  of  the  83d  Ohio  General 

Assembly.     Columbus,  1919.-165  dd     Paees  S'^19a  .^^r-    ?u     „  ^'^^^ 

o«  (^  Overoiion  of  St^U  Income  TaZ,  hytZ^^lZ  "  '^'^ 

Reports  of  the  Board  of  Taxation  mUh  a  Report  on  Taxation  in  th^  P..„„ 

^r^  0/  £nm  ColunMa.     By  Robert  Murray  H  J^Tctori^'^mr 

»  Taxalim  in  the  Urban  Municipalities  of  Saskatchewan.    A  Re,m-t  to 


638 


ESSAYS  IN  TAXATION 


B 


f^i 


f 


I  » 


il 


1 


sistance  was  rendered  by  Professor  A.  B.  Clark,  of  the  Univer- 
ity  of  Manitoba,  to  the  commission  of  that  province,  whose 
comprehensive  report  ^  recommended  the  reimposition  of  a 
tax  on  improvements;  the  taxation  of  real  estate,  of  business 
and  of  income  for  local  purposes;  the  taxation  of  corporations 
and  inheritances  together  with  a  supplementary  revenue 
tax  for  provincial  purposes;  and  the  abolition  of  the  poll 
tax. 

The  year  1920  is  marked  by  a  short  New  Jersey  report.^ 
As  between  classification  and  the  income  tax  as  substitutes  for 
the  personal  property  tax,  the  commission  consider  the  former 
a  mere  palliative.  They  therefore  recommend  the  income  tax 
together  with  a  tax  on  business.  The  Delaware  commission  ^ 
state  that  the  state  ''has  no  system  of  taxation."  As  a  pre- 
liniinary  to  all  improvements  they  urge  a  permanent  tax  com- 
mission. The  most  elaborate  report  of  the  year  is  that  of  New 
Mexico  ^  which  again  enjoyed  the  advantage  of  Professor  Haig 
as  special  counsellor.  The  report  recommends  a  permanent 
tax  commission  and  a  state  income  tax  and  devotes  especial 
attention  to  mine  taxation,  urging  the  practicability  of  the 
od  valorem  system. 

Finally,  the  year  1921  witnessed  the  progress  of  the  reform 
movement  into  the  southern  states.  The  South  Carolina 
report  ^  which  describes  the  situation  as  "a  state  of  anarchy" 
recommends  an  inheritance  tax,  a  classified  property  tax,  and 
a  supplementary  income  tax.  The  Louisiana  commission  fall 
into  line  by  suggesting  ^  not  alone  the  above  imposts,  but  also 

the  Government  of  the  Province  of  Saskatchewan.    By  Robert  Murray  Haig 
Regina,  1917.— 48  pp. 

1  Province  of  Manitoba.  Report  of  the  Assesmient  and  Taxation  Com- 
mittee 1919.— 217  pp.  Professor  Clark's  report  which  is  found  in  the 
appendix  was  reprinted  with  additions  as  An  Outline  of  Proirincial  and 
Municipal  Taxation  in  British  Columbia,  Alberta,  and  Saskatchewan  (Winni- 
peg, 1920).— 97  pp. 

2  Report  of  the  Commission  to  investigate  Tax  Laws.  Trenton,  1920. — 
40  pp. 

'Report  and  Recommendations  of  Delaware  State  Survey  Commission. 
1920.— 95  pp. 

*  Report  of  the  New  Mexico  Special  Revenue  Commission.  Santa  Fe, 
1920—324  pp. 

^  Report  of  the  Joint  Special  Committee  on  Revenue  and  Taxation.  Co- 
lumbia, S.  C,  178  pp. 

*  State  of  Louisiana.  Report  of  the  Assessment  and  Taxation  Commission 
to  the  Constitutional  Convention.     1921. — 237  pp. 


AMERICAN  REPORTS  ON  TAXATION  639 

a  business  tax,  a  corporation  tax,  a  severance  tax  on  natural 
resources,  and  a  centralized  tax  administration. 

VI.  Conclusion 

InTe  ™"''^  »''^  ^""^^"^  ^  °"'y  -  few'statet^^y 
are  now  expressed  by  every  one  of  the  special  state  tax  com- 
missions without  exception,  and  by  almost  all  the  permanent 
fax  commissions.    Since  a  recognition  of  the  evils  ^  be  over- 

aTbr„t??dv:^f  ^""^  "^  ^'°^'^^'  ^^^«  -^  ^  -^^-d 

In  the  second  place,  there  is  a  growing  recognition  of  the 
weakness  of  the  local  assessment  of  property,  whether  real  or 
personal.  What  Sidney  Webb  has  recently  ^Ued  the  "1™^" 
can  anarchy  of  local  autonomy"  is  slowly  being  recogniz^by 
the  admmistrative  officials  themselves.  Nothing,  ^rhapT 
has  been  more  cheering  during  the  la.st  few  yea^  than  the 
progress  of  centralization  of  assessment  and  the  creation  of 
permanent  commissions  designed  to  cope  with  this  evil  The 
movement  has  only  just  begin,  and  fron.  its  continuance  much 
may  be  expected  in  the  future. 

In  the  third  place,  there  has  been  a  great  spread  of  the  idea 
of  the  separation  of  state  and  local  revenues  in  the  sense  of  the 
abandonment  of  the  sole  or  even  the  chief  reliance  by  the  stat^ 
on  a  locally  assessed  direct  property  tax.  MoreC  mor^ 
states  have  come  to  depend  on  centrally-assessed  corporation 
and  inheritance  taxes  The  earlier  need  of  a  complete'^Crt 
tion  of  sources  as  realized  in  California  and  at  one  time  in  New 
York  has  more  recently,  however,  become  unnecessaiy,  partly 
because  of  the  device  utilized  by  Comiecticut  to  overcome 
the  weakness  of  an  apportionment  by  value '  and  partly  be- 
cause of  the  development  of  the  centrally-assessed  state  income 
taxes,  with  the  adoption  of  the  principle  of  division  of  yield 

J-ourthly,  the  discussion  of  possible  substitutes  for  the  per- 
sonal property  tax  has  made  considerable  progress.     At  one 
tune  the  device  of  classification  seemed  to  promise  good  results 
and  even  at  the  present  time  (1921)  almost  all  the  commis^ 

*C/.  supra,  p.  363. 


KM 


Il 


;» 


m 

\  III 


640 


ESSAYS  IN  TAXATION 


sions  in  states  with  rigid  constitutions  are  in  favor  of  relaxing 
the  constitutional  prohibition.  But  within  the  past  few  years 
this  movement  has  been  replaced  by  the  tendency  to  substitute 
for  the  old  locally-assessed  personal  property  tax  the  new 
centrally-assessed  state  income  tax.  This  tendency  has  been 
notably  strengthened  by  the  recent  reforms  in  New  York  and 
Massachusetts.^ 

Finally,  perhaps  the  most  encouraging  results  of  the  last 
decade  have  been  the  increasing  attention  given  to  the  problem; 
the  great  improvement  in  the  character  of  the  commissions, 
both  special  and  permanent;  the  utilization  to  an  ever  increasing 
degree  of  the  expert  and  of  the  professional  economist;  and  the 
evident  determination  on  the  part,  of  the  various  commissions 
to  keep  abreast  of  the  Ijest  action  and  of  the  be^  thought  in 
the  other  commonwealths. 

It  may  indeed  now  be  said  that  the  movement  for  tax  reform 
is  en  train.  Never  before  has  so  much  attention  been  devoted 
to  it.  Never  before  has  there  been  so  intelligent  and  so  vigorous 
a  discussion.  Never  before  has  there  been  manifested  such 
anxiety  to  deal  correctly  and  yet  conservatively  with  the  prob- 
lem. To  this  result  the  annual  conferences  of  the  National 
Tax  Association  have  contributed  not  a  little,  and  we  may 
expect  to  witness  during  the  next  few  years' a  still  more  decided 
evidence  of  the  progress  which  has  now  become  so  marked  and 
so  widespread  in  the  United  States. 

^  Infra,  p.  059. 


i 

5 
I 


CHAPTER  XX 

THE  NEXT  STEP  IN  TAX  REFORM  ' 

We  have  been  discussing  for  many  years,  the  problem  of 
the  reform  of  our  state  and  local  system  of  taxation  WhiJe 
there  has  been  no  complete  agreement  as  to  the  remedy  there 
ha^  been  a  virtual  unanimity  in  the  diagnosis  of  the  diseaT^ 
The  three  fundamental  shortcomings  of  our  present  sX 

sistence  of  the  general   property  tax   as  the  sole  or  princiDal 

thruHltr'""f '.i'"  ^^f^"  "^  ^""'"'y  '-'^'  assessment; Td 

iuroose       Rv  f    t  T'  '''^''  '^"^  ^°'  ^^^^  ^'^'^  ^^  local 
purposes.     By  far  the  larger  part  of  dissatisfaction  with  our 

system  is  referable  to  one  or  other  of  these  facts.    And  it  is  a 

ch«.rmg  sign  of  progress  that  whereas  a  decade  or  two  ajo 

tbs  analysis  was  recognized  by  only  few  students,  still  fewei^ 

officials  and  a  veiy  insignificant  fraction  of  the  general  pubhc 

m  the  mast  advanced  industrial  states,  there  is  ft  the  pSnt 

day  a  widespread  acceptance  of  its  truth  in  almost  eveiy  state 

of  the  un,on  and  m  continually  larger  sections  of  the  popuTatioJ! 

As  to  the  remedies,  however,  we  have  by  no  means  nro- 

fhrn^al  ''"  r  r"*'  f"''"'  '*  ^^y  •-  -^"  thTt 
there  is  now  also  almost  complete  unanimity-namelv    the 

necessity  of  central  fiscal  administration  or  at  all  e v^^'ts  of 

^eatly  increased  central   control  over  the  local  admSrL 

creatiol  of  r'"'"'''      """  '*'**""'"*  ''  ^"''^^t«d  ^y  the  recent 
creation  of  the  numerous  state  tax  commission  which  have 

been   a«d  still  are,  doing  .such  admirable  work  in  improvS 

fiscal  conditions.     But  further  than  that,  we  have  s^ca'dy 

In  a  few  of  our  states  indeed,  which  have  been  entirelv 
untrammeled  by  constitutional  restrictions,  the   old  ^S 

Tax  Association.    San  Francisco,  Aug.  11,  1915.  National 

641 


r 


642 


ESSAYS  IN  TAXATION 


property  tax  has  been  supplemented  by  specific  taxes— often 
loosely  called  indirect  taxes — on  corporations,  inheritances 
and  the  like;  and  in  a  very  few  cases  some  particular  categories 
of  personalty  have  been  taken  out  of  the  general  property  tax 
and  treated  in  a  special  way.  And  in  not  a  few  states,  the 
recent  movement  in  the  direction  of  tax  reform  has  consisted 
in  an  attempt  to  modify  the  strict  limitations  of  the  constitu- 
tion so  as  to  permit  of  the  introduction  of  this  system  of  a 
classified  property  tax. 


•1 


I 


I.  The  Classification  of  Property 

That  the  movement  toward  a  classification  of  property  for 
purposes  of  taxation  is  a  step  in  advance  will  scarcely  be  ques- 
tioned. For  anything  that  releases  us  from  dependence  on 
the  general  property  tax,  as  almost  everywhere  understood, 
is  warmly  to  be  welcomed.  More  recently,  however,  there 
has  developed  a  situation  which  is  calculated  to  give  us  all 
pause  and  to  lead  us  to  study  the  problem  from  a  new  point 
of  view.  What  we  refer  to  is  the  fact  that  in  one  of  the  most 
advanced  states.  New  York,  which  was  unhampered  by  its 
constitution,  which  had  by  law  taxed  certain  kinds  of  personal 
property  in  a  special  way  and  at  a  special  rate,  and  which 
had  in  practice  well-nigh  exempted  other  forms  of  both  tangible 
and  intangible  personalty, — in  this  state  the  need  has  re- 
cently arisen  for  a  vastly  increased  revenue,  for  the  purposes 
both  of  the  state  and  of  the  City  of  New  York.  It  was  esti- 
mated that  to  put  the  state  on  a  sound  fiscal  basis,  an  addi- 
tional revenue  of  from  at  least  twenty  to  thirty  millions 
would  be  needed,  chiefly  in  order  to  defray  the  interest  and 
amortization  costs  of  the  large  debt  incurred,  and  hereafter 
to  be  incurred,  for  the  enlargement  of  the  Erie  Canal  and 
for  the  construction  of  an  improved  system  of  state  high- 
ways. In  the  City  of  New  York  alone,  a  similar  additional 
revenue  of  from  twenty  to  thirty  millions  a  year  would 
be  required  partly  because  of  the  adoption  of  the  pay-as- 
you-go  policy  of  financing  capital  improvements,  partly  be- 
cause of  the  exigencies  of  the  Rapid  Transit  situation  and 
partly  because  of  the  needed  contributions  to  the  state  revenue. 

The  sudden  injection  of  these  additional  obligations  into 
the  New  York  situation  have  raised  the  entire  problem  in  a 
much  more  acute  form  than  anywhere  else.    For  in  most  com- 


THE  NEXT  STEP  IN  TAX  REFORM  643 

monwealths  where  there  is  a  movement  toward  a  classified 
property  tax,  the  problem  is  primarily  one  of  justice  in  taxa. 

nrohlPrn  V'  ^  T^'""  'T'  ^  '*^^'^^'  ^^^^^^  than  a  fiscal, 
problem.  It  is  not  so  much  a  question  of  securing  more  rev- 
enue, as  of  substituting  a  superior  for  an  inferior  method  of 
securing   the  same   revenue-a  revenue   that  might   be   ex- 

Elatfon  R  ";  '•'  T'^'^  T'^  '^'  P^^^^^««  «f  ^^-Ith  and 
PrTftv  ^-  ^^  T  ^'^  ^^'^'  ^^''^  t^^  «ld  general  prop- 
whLfh.       'r  %^'^'  ""f '"'"  disappeared  in  practice  and 

•  whTch  sHll  ^.V^^  """^  ""'  '^  ^'"^'^^  ^"^*  ^^  ^  ^^^'^  states 
which  still  make  the  vam  attempt  to  enforce  the  tax  with 

rXnue  wSo^'^'"  "  ''^'  ^'  ^^^"™^  ^  ^^^^^^  -— ^ 

S  In  M  h  'TT^  ""^""V'^^  "^*^*^  ^  '^^'  «f  taxation 
which  would  be  so  high  as  to  be  virtually  confiscatory.     It 

IS  of  course,  not  mtended  to  deny  that  the  need  of  increased 
revenue  is  not  being  more  and  more  strongly  felt  in  other 
states;  but  m  none  of  them,  to  our  knowledgeYas  such  a  c ris 
been  suddenly  precipitated  upon  an  unprepared  public. 

1  his  situation  has  caused  a  rude  awakening  to  those  who 
have  always  considered  New  York  in  the  forefront  of  tax 
reform  in  that  the  Empire  State  has  made  greater  progress 
than  most  of  the  other  commonwealths  in  its  practical  de- 
parture from  the  old  general  property  tax.  Th^  eSendes 
of  the  new  situation  led  to  the  appointment  both  of  a  State 

S  C^v  ofT^'v'  r'  f  '   ^^^^^^   T^^   ^^--ittee 

Ttion  nf  .^  ^"^  ^""t'  ^""^  ^'^  ^^"^  ^^"«^"g  ^  reconsider- 
ation of  the  entire  problem.  According  to  the  views  com- 
monly expressed  there  are  only  two  solutions:  either  the 
contmuation  of  the  present  New  York  system,  which  would 
mean,  ih  practifce,  an  immensely  increased  tax  rate  on  real 
estate;  or,  on  the  other  hand,  the  attempt  to  tax  in  a  greatlv 
extended  form  those  classes  of  tangible  and  intangible  per- 
sonalty which  are  now  either  taxed  at  an  insignificant  rate 
or  not  reached  at  all. 

Whereas,  therefore,  in  most  of  the  states  which  still  have 
the  old  general  property  tax,  the  movement  toward  a  classi- 
fied property  tax  might  be  welcomed  as  a  means  of  escaping 
from  an  antiquated  and  increasingly  unendurable  system   in 

na'rt    flf  °^   ^f^  ^°*  ^^^^  "''"^"^^  ^"^^  '^'  "^^  «y«tem  In 
part,  the  problem  anses  as  to  whether  we  shall  still  further 

develop  this  new  system  or  cut  loose  from  it  entirely.    The 


■ 


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II 


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ESSAYS  IN  TAXATION 


problem,  in  other  words,  is  not  so  much  the  superiority  of  a 
classified  property  tax  over  the  old  general  property  tax  (which 
in  practice  no  longer  exists),  as  the  relative  advantages  and 
disadvantages  of  a  classified  property  tax  compared  not 
with  the  general  property  tax,  but  with  something  that  is 
possibly  better  than  either. 

Regarded  from  this  point  of  view,  the  shortcomings  of  a 
classified  property  tax  are  obvious.* 

In  practice  a  classified  property  tax  must  be  a  low-rate  tax 
on  certain  forms  of  personalty  and  especially  of  intangible 
personalty.  Such  a  system  has  been  in  vogue  for  many  dec- 
ades in  Pennsylvania.  Here,  however,  we  are  told  by  the 
Pennsylvania  commission  of  1911  that  the  low-rate  tax  on 
personal  property  has  been  only  ''more  or  less  successfully 
collected."  The  sole  part  of  the  tax  which  has  been  a  con- 
spicuous success  is  stated  to  be  the  tax  on  mortgages.  Yet 
in  the  state  of  New  York  any  attempt  to  levy  even  a  low- 
rate  annual  direct  tax  on  mortgages  would  meet  with  the 
strenuous  opposition  of  the  real  estate  interests,  large  and 
small,  at  all  events  in  all  of  the  cities,  because  the  experience 
of  a  decade  ago  has  convinced  everyone  of  the  undoubted 
economic  truth  that  under  the  conditions  existing  in  New 
York  a  direct  tax  on  mortgages  is  inevitably  shifted  to  the 
borrower.  The  commission  further  tells  us  that  "so  far  as 
Pennsylvania  clings  to  the  personal  property  tax  in  vogue, 
in  other  states,  by  attempting  to  tax  other  money  investments, 
she  undoubtedly  suffers  the  same  failure  as  the  other  states." 

*As  the  purpose  of  the  original  address,  from  which  this  chapter  is 
reprinted,  was  to  prevent  the  state  of  New  York  from  adopting  the  classi- 
fied property  tax,  especial  stress  was  laid  on  the  defects,  rather  than  the 
merits  of  the  system.  The  object  of  this  address  was  attained,  and  within 
a  few  years  New  York  followed  the  advice  here  proffered.  The  defects 
of  the  system  are  minimized  in  C.  J.  Bullock,  "A  Classified  Property 
Tax"  in  Proceedings  of  the  Third  Conference  of  the  National  Tax 
Association  (1010),  p.  95.  After  Professor  Bullock's  failure  to  per- 
suade Massachusetts  to  accept  his  plan  of  reform,  he  somewhat  modi- 
fied his  view  in  "The  State  Income  Tax  and  the  Classified  Property 
Tax"  Tenth  Conference  (1917),  p.  362.  Further  experience  may  lead  him 
to  modify  his  conclusion  that  "the  state  income  tax  should  not  be  re- 
garded as  the  rival,  but  rather  the  complement,  or  helpmate,  of  the  classi- 
fied property  tax"  (p.  384).  Prof.  H.  L.  Lutz,  The  Chs^fication  of  Prop- 
erty for  Taxation,  Columbus,  1919,  takes  the  more  defensible  position  of 
"setting  forth  the  advantages  of  classification  as  a  preliminary  stage  of 
tax  reform." 


THE  NEXT  STEP  IN  TAX  REFORM  645 

In^ZT^'''^''  P™"''  T  *^*  ^<^^nties  as  well  as  moneys 
on  deposit  are  not  reached  "because  there  is  no  source  of 

re  Z"     ?   TifP*   ^^^  ^T''^   °f  '^"^  P*"-^""   "taking   the 

[n  Ppnn  1  "*"■  T'^'i  ^^^  °'^"^'  ^^--^^t  °n  the  situation 
m  Pennsylvania  ,s  that  the  low-rate  tax  on  intangible  pei^on- 
alty  apart  from  the  tax  on  mortgages,  is  just  about  as 
much  of  a  failure  as  the  ordinary  tax  levied  elsewhere  on 
personalty. 

In  Connecticut,  the  low-rate  tax  on  choses  in  action  has 
been  enforced  since  1890.'  But,  as  eveiyone  who  is  acquainted 
with  the  condition  knows,  it  is  almost  a  complete  farce.^  In 
Maryland,  where  the  low-rate  tax  on  certain  intangibles  (se- 
curities) was  introduced  in  1896 '  and  has  been  administered 
by  officials  of  remarkable  abiUty,  there  is  no  pretense  of  any 
Idea  that  real  equahty  in  taxation  is  attained  or  that  great 
evasions  are  not  practiced.  Outside  of  Baltimore  at  large  the 
system  is  conceded  to  be  a  notorious  failure.'' 

Even  in  the  states  where  the  reform  has  been  introduced 

madrnnX  ^r  ""^^  '°™^  e»«o">-aging  progress  has  been 
made  under  the  guidance  of  efficient  permanent  tax  com- 
missions. It  IS  to  be  emphasized  that  the  low  personalty  tax, 
whatever  may  be  its  advantages  over  the  old  general  property 
tax,  has  not  proved  a  conspicuous  success  as  a  source  of  large 
additional  revenue.  In  Rhode  Island,  where  the  low-rate  tax 
on  mtangibles  was  mtroduced  in  1912  and  where,  as  is  natural, 
the  assessment  considerably  increased,  it  is  impossible  to  as^ 
certam  whether  ihe  revenue  from  this  class  of  personalty  is  now 
more  or  less  than  before.  It  is  to  be  observed,  however,  that, 
despite  the  notorious  escape  of  intangibles  before  the  enactment 
ot  the  new  law,  the  mcrease  in  the  assessment  of  intangibles  has 

'  In  1897  the  rate  was  increased  from  2  to  4  mills 

'Cf.  F.  R.  Fairchild,  "Registration  Taxes  on  Intangibles,  with  Soecial 
T^^^fTl       »■}«  Co"necticutChose-in-AetionTa^,"  in  Pro^ng:7fe 
Twdfth  Annual  Conference  of  the  National  Tax  Association,  1920,  n    152 
Professor  Fmrehild  emphasizes  the  general  position  taken   n  this  ehapter 
by  saymg  "that  there  was  a  readiness,  altogether  too  optimistic  I  tUnk 
to  assume  that  the  low-rate  taxation  of  intangibles  has  been  a^ 

for  ^tlte  pITr^sL^  "^  ^""^  ^""""^  ^'^'''^''    ^"^  ^^^^'  ^^  "^^  ^^'^  ^^^ 
'  The  assessment  of  securities  in  1919  outside  of  Baltimore  citv  and 
^""Jy  ^^?^35,407  499  out  of  a  joint  property  assessment  of  $4?3,627  6^2 
Cf.  Third  Biennial  Report  of  the  State  Tax  Commission  of  Maryland  1920.-^ 

pp.    ^o.  ' 


V 


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IB'  I 


646 


ESSAYS  IN  TAXATION 


been  only  slightly  more  than  that  of  real  estate,^  and  that  the 
tax  commissioners  do  not  attempt  to  conceal  their  disappoint- 
ment. ^  In  Minnesota,  where  the  law  was  introduced  in  1911 
and  where  exact  comparative  figures  are  ascertainable,  the 
revenue  at  first  actually  fell  off;  since  then  under  an  admirable 
administration  the  revenue  has  grown  substantially  but  is 
still  comparatively  insignificant.^    In  the  years  1911-1914  the 

1  The  figures  are  as  follows: 

Assessment  of 
Real  Estate  Intangibles 

1912 $432,200,838  $96,758,872 

1913 449,732,569  115,129,149 

1914 459,653,296  123,953,431 

1915 469,375,088  126,715,594 

1916 478,782,040  135,736,347 

1917 499,643,761  145,927,531 

1918 510,915,710  149,554,960 

1919 525,410,481  168,977,318 

1920 599,134,386  203,499,468 

The  above  figures  of  intangibles  include  only  the  intangibles  locally 
assessed,  and  not  the  securities  of  corporations,  trust  companies  and  banks, 
which  are  subject  to  what  are  elsewhere  called  corporation  taxes  and 
which  in  Rhode  Island  were  formerly,  in  part  at  least,  subject  to  local 
assessment.  It  must  also  be  rememberetl  that  the  new  law  permits  the 
offset  for  indebtedness  against  certain  intangibles  and  not,  as  formerly 
against  tangibles,  thus  reducing  the  taxable  amount  of  intangibles. 

*  "This  increase  in  the  assessed  valuation  of  intangibles,  falls  far  short 
of  reaching  anything  like  the  full  amount  of  such  property  taxable  in  the 
state,  and  in  some  cases  its  absence  from  the  tax  roll  is  inexplicable  except 
upon  the  hypothesis  that  the  omission  is  intentional."  Eighth  Report  of 
the  Tax  Commissioners  made  to  the  Governor  of  the  State  of  Rhode  Island 
for  the  Biennial  Period,  1919-1920.  Providence,  1921. — p.  17.  This  reads 
like  the  old  complaints  before  the  adoption  of  the  system  of  classification. 

'  The  figures  are  as  follows: 

Number  assessed  Assessment  Revenue 

1910 $  6,200  $13,919,806  $379,754 

1911 41,439  115,481,807  346,445 

1912 50,564  135,369,314  406,107 

1913 57,068  156,969,892  470,909 

1914 73,266  196,548,307  689,644 

1915 73,062  212,134,901  636,404 

1916 74,219  234,136,268  702,588 

1917 87,688  284,968,875  854,907 

1918 98,502  330,300,219  990,900 

1919 109,215  359,798,976  1,079,399 

1920 127,471  437,628,371  1,312,886 


m 


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^1 


THE  NEXT  STEP  IN  TAX  REFORM  647 

^n^fi?^  n*. /I  "'*?''^'^^^^    increased    from    $115,676,126    to 
SF197  625,914;  but  m  the  same  period  the  assessment  of  real 
estate  (exclusive  of  town  and  city  lots)  increased  far  more 
namely,  from  S664,930,374  to  $872,296,355.     And  in  1914  the 
assessment  of  intangibles  was  still  pitifully  small  when  com- 
pared to  the  assessment  of  other  property  in  general-the 
figures  bemg  196  and  1,475  millions  of  doUars  respectively.  ^ 
in  tact  the  able  tax  commission  tells  us  very  frankly  ''It  is 
doubtful  If  the  returns  this  year,  large  as  they  are,  represent 
more  than  one  third  of  what  they  should  be.^    Finally  in  Iowa 
where  the  low-rate  tax  was  introduced  in  1911,  the  revenue  wa^ 
now  undoubtedly  much  smaUer  than  before.     It  is  true  that 
under  the  new  law  somewhat  more  "moneys  and  credits"  were 
assessed :  but  as  the  new  rate  was  only  5  mills  the  proceeds  were 
actually  much  less.     The  exact  figures  are  not  ascertainable 
from   the   auditor's   reports   without   laborious   computation- 
but  a  member  of  the  state  tax  commission  states  that  the 
amount  of  revenue  was  reduced  at  least  one-half.^    What- 
ever, therefore,  may  be  claimed  for  the  low-rate  tax,  it  does 
not  seem  probable  that  the  amount  of  additional  revenue  which 
It  would  quickly  yield  would  be  its  strong  point.     It  is  alto- 
gether hkely  that  whatever  the  ultimate  revenue  might  be 
It  would  be  slow  in  developing.^     It  is  hence  questionable 

9  iVr?"  ^'^  *^^  situation  was  about  the  same,  the  figures  being  437  and 
2,115  millions  respectively,  and  there  having  been  no  reassessment  of  real 
estate  m  that  year. 

2  Report  of  the  Minn.  Tax  Commission,  1914.— p.  74.  They  add  •  "  but  we 
are  making  progress.  .  .  .  While  we  may  never  succeed  in"  reaching 
all  of  the  property  even  under  the  present  method,  yet  we  believe  aU 
things  considered,  that  it  is  a  decided  improvement  over  the  old  glneral 
property  system."  In  this  conclusion  every  one  will  of  course  concur 
Nevertheless,  the  chairman  of  the  commission,  Mr.  Lord  now  0921) 
strongly  urges  the  adoption  of  an  income-tax  law  ' 

•Professor  J.  G.  Brindley  writes  that  "I  am  not  able  to  give  you  a 
statemen  of  the  actual  revenue  derived.  .  .  .  But  in  view  of  the  f^ct! 
that  the  listing  of  moneys  and  credits  only  slightly  increased,  the  amount 

aLrnrr'"^  "^^''"^7  ^""'T?^-  •  •  •  Iti«safetoWttathe 
Tw  W'  ''^^^''''^  ""^  decreased  by  at  lea^t  one-half  as  a  result  of  the 

.  '  ^'^!  J*  'I  ^""^  *3?*  *^^  '■^^^'^"^  ^^*^"^  t^^  *a^  later  on  graduaUy  in- 
creased, the  change  did  not  begin  to  keep  pace  with  the  increase  in  the 
general  state  revenue.    This  is  apparent  from  the  table  on  the  next  page. 

(19^  L'^'^'s  ^.Q.  P  f  '"^  ^i'  ■^T''^'  ^'""'"^^  '^  Economics,  ^ 
(1916),  pp.  588-595,  Professor  Brindley  expresses  the  opinion  that  the 

real  explanation  of  the  lack  of  success  of  the  classified  property  tax^ 


K'  1 


1% 


648  ESSAYS  IN  TAXATION 

whether  the  project  would  be  of  advantage  in  commonwealths 
situated  like  New  York. 

Moreover,  while  freely  conceding  the  inestimable  supe- 
riority of  a  classified  property  tax  over  the  existing  general 
property  tax,^  it  must  be  remembered  that  even  if  there  were 
an  entirely  admirable  administrative  system  in  vogue,  and 
even  if  the  fiscal  results  were  wholly  satisfactory,  there  still 
are  two  considerations  which  should  give  us  pause.  The 
first  is  that  under  modem  economic  conditions  no  attempt 
to  assess  a  tax  on  intangible  personalty  can  ever  be  com- 
pletely successful.  The  general  property  tax  arose  at  a  time 
when  the  economic  unit  was  local  in  character  and  when  it 
was  entirely  possible  for  the  local  administration  to  assess 
the  property  of  the  individual.  The  same  was  true  to  a  large 
extent  of  the  early  conditions  of  American  economic  life, 
and  it  is  still  in  part  true  of  the  more  primitive  of  our  rural 
communities.  But  under  our  modern  industrial  and  capi- 
talist development,  the  basis  of  personal  property  has  be- 
come national  or  even  international  instead  of  local  and  the 
great  mass  of  personalty  is  now  of  an  intangible  character. 
Under  such  conditions  and  especially  where  the  old  and  still 
surviving  poUtical  and  legal  considerations  run  athwart  the 
economic  facts,  the  attempt  to  reach  intangible  personalty 

Iowa  is  defective  administration.  A  few  years  later,  however,  Professor 
Brindley  expressed  his  preference  for  a  state  income  tax.  History  of  Tax- 
ation in  Iowa,  1910-1920,  1921,  p.  51. 

Statistics  of  the  Iowa  Tax  on  Intangibles 

Flat  rate  tax  State  share 

on  money  and  credits  of  flat  tax         Total  stale  revenue 

1912 $  945,996  $77,370  $4,983,448 

1913 1,053,563                     88,053  5,423,111 

1914 1,259,143                     97,784  6,100,660 

1915 1,376,809  102,111  6,706,484 

1916 1,536,293  107,244  8,546,046 

1917 1,649,773  169,882  9,236,819 

1918 2,180,344  193,839  11,569,658 

1919 2,341,389  202,035  13,908,135 

1920 3,137,938  238,791  20,225,742 

1  This  superiority  has  recently  been  strikingly  attested  in  Kentucky, 
since  the  introduction  of  classification  in  1917,  as  appears  from  the  fol- 
lowing figures  of  revenue  from  intangibles  as  compared  with  land : 

1917  1921 

Bank  deposits $   61,474  $284,161 

Intangibles 378,129  1,233,674 

Lands 2,154,321  2,943,218 


I 


THE  NEXT  STEP  IN  TAX  REFORM  649 

meets  with  almost  insuperable  diflSculties.  Especially  in  com- 
munities like  New  York  City,  which  are  situated  at  the  state 
border,  the  opportunities  for  evasion  are  singularly  multiplied 
It  will  be  repHed  that  a  low-rate  tax  will  remove  this  temp- 
tation to  evasion.  It  must  be  remembered,  however  that 
even  a  four  or  five-mill  rate  represents  in  a  large  mass  of  se- 
curities an  income  tax  of  about  ten  per  cent;  and  he  would  indeed 
be  optimistic  who  holds  that  such  a  burden  would  not  be  ap- 
preciable, or  would  not  lead  men  into  temptation.  Any  sys- 
tem of  taxation  which  needlessly  multiplies  the  temptations  to 
evasion  is  to  deprecated.  Under  the  existing  legal  system 
m  the  United  States,  the  conflict  between  location  and  resi- 
dence m  the  matter  of  the  taxation  of  personal  property  is 
indeed  an  irrepressible  conflict.  The  result,  even  with  the 
most  admirable  administration,  is  bound  to  be  inequality  and 
injustice. 

But  the  second  consideration  is  still  more  weighty.     For 
the  objection  inheres  in  the  very  theory  of  the  property  tax. 
As  we  have  had  frequent  occasion  to  point  out,  under  m^oderii 
economic  conditions,  property  and  especially  personal  prop- 
w  "^'i  l^  "^  ^^"^®^'  ^  satisfactory  index  of  tax-paying  ability. 
Wealth  m  modern  times  is  derived  to  a  continually  larger 
extent  from  relations,  from  opportunities,  and  from  all  manner 
of  exertion  more  or  less  indirectly,  or  not  at  all,  connected 
with  property.     Huge  oflScial  salaries  and  large  professional 
incomes  are  a  common  occurrence  to-day  and  would  go  en- 
tirely free  under  a  property  tax.     Individual  and  corporate 
profits    denved    from    good-will,  from    franchises,  from    gov- 
vernmental  favors  and  opportunities  constitute  an  increasing 
flow  of  wealth  which  is  either  not  at  all,  or  only  in  part,  in- 
corporated into  changes  of  capital  value.     Business  men  in 
general  throughout  the  United  States  are  slowly  coming  to 
the  conclusion  that  their  tax-paying  al^ility  is  in  no  direct 
relation  to  their  stock  in  trade.     In  certain  classes  of  enter- 
prise like  forestry,  for  example,  it  has  come  to  be  ahnost 
universally  recognized  that  a  system  of  taxation   based   on 
property  is  opposed  to  the  best  interests  of  the  community  as 
a  whole. 

It  cannot  be  denied  that  in  the  case  of  real  estate  in  general 
and  especially  in  the  case  of  city  real  estate,  the  advantages  of 
an  assessment  of  property  are  great;  but  it  is  to  be  remembered 
that  in  such  cases  every  change  in  profits  or  yield  is  at  once 


650 


ESSAYS  IN  TAXATION 


I 


>' 


31 


.* 


reflected  in  a  change  in  the  capital  value  of  the  property.  As 
has  just  been  pointed  out,  however,  this  consideration  is  true  to 
a  much  smaller  extent  of  the  great  mass  of  modem  profits  or 
incomes.  To  the  extent  that  it  is  not  true,  property  is  losing 
its  former  value  as  a  criterion  of  tax-paying  ability. 

It  is  largely  for  this  reason  that  any  kind  of  a  tax  on  per- 
sonalty would  not  be  only  unpopular  but  hazardous  in  a  large 
center  like  New  York  City.  Merchants'  stock  in  trade  is 
now  virtually  not  taxed  at  all  in  New  York.  If  it  were  to 
be  assessed  at  what  might  appear  to  be  even  a  comparatively 
low  rate,  there  would  l)e  grave  danger  of  its  seriously  inter- 
fering with  the  prosperity  of  New  York  as  a  manufacturing 
and  jobbing  center.  For  the  stocks  in  trade  of  many  busi- 
nesses in  New  York  are  out  of  all  proportion  to  their  profits. 
And  if  in  addition  an  attempt  should  ])e  made  to  levy  even  a 
small  tax  on  intangible  personalty  consisting  of  securities 
and  bank  deposits,  it  is  clear  that  the  financial  dominance  of 
New  York  might  be  very  seriously  menaced,  because  even  a 
low  tax  on  such  property  would  be  out  of  all  proportion  to 
the  profits  from  the  turnover  of  the  property.  What  is  true 
of  New  York  City  would  come  to  be  true  before  long  in  a 
corresponding  degree  of  other  large  commercial  and  finan- 
cial communities. 

Let  us  recognize  the  fact  then,  once  and  for  all,  that  a  sys- 
tem of  property  taxation,  except  in  so  far  as  certain  forms 
of  real  estate  are  concerned,  is  unsuited  to  modem  economic 
conditions  as  the  ordinary  and  principal  source  of  revenue, 
however  strong  the  argimients  may  be  for  its  utilization  in 
exceptional  crises  as  in  the  European  post-bellum  situation. 
Let  us  boldly  face  the  situation  and  confess  that  while  a  classi- 
fied property  tax  may  constitute  the  only  possible  step  in 
advance  for  those  states  that  are  still  tied  up  by  a  rigid  con- 
stitution, the  scheme  is  inappUcable  to,  or  undesirable  for, 
those  states  which  are  more  fortunately  situated  from  the 
constitutional  point  of  view;  and  that  even  in  the  former  class 
of  states  the  energy  that  is  being  developed  in  the  promotion 
of  a  classified  property  tax  might  more  profitably  be  directed 
to  what  is  at  all  events  a  more  thorough-going  remedy. 

II.  The  Income  Tax 

What  then  is  this  better  remedy  and  what  is  the  next  step 
for  states  like  New  York?    We  have  no  hesitation  at  the  present 


'HII 


THE  NEXT  STEP  IN  TAX  REFORM 


651 


time  in  answering:  the  substitution  of  income  for  property  as 
the  basis  of  taxation. 

This  will  perhaps  come  as  a  surprise  from  one  who  has  uni- 
formly resisted  the  introduction  of  a  state  income  tax  in  the 
United  States.^  Several  things  must,  however,  be  remembered. 
In  the  first  place,  we  have  now  for  more  than  twenty  years 
been  striving,  as  best  we  could,  to  call  attention  to  the  short- 
comings of  property  as  a  theoretical  basis  of  tax-paying  ability. 
In  the  second  place,  we  have  always  advocated  the  policy  of 
taxing  corporations  on  a  net-receipts  or  income  basis.  Thirdly, 
we  have  always  been  in  favor  of  a  federal  income  tax  in  gen- 
eral and  have  contributed  our  modest  share  toward  the  elab- 
oration of  the  present  act.  The  struggle  over  the  ratification 
of  the  sixteenth  amendment  was  so  acute  in  important  states 
like  New  York  that  any  advocacy  of  a  state  income  tax  would 
surely  have  killed  the  prospects  of  ratification.  In  the  fourth 
place,  our  objection  to  a  state  income  tax  has  been  almost 
entirely  due  to  the  belief  that,  with  the  administrative  methods 
then  almost  uniformly  in  vogue,  it  would  be  just  about  as 
difficult  to  localize  income  for  purposes  of  taxation  as  it  has 
been,  and  still  is,  to  localize  property. 

Two  events,  however,  have  recently  occurred  to  cause  a 
reappraisement  of  the  situation.  In  the  first  place,  great 
progress  has  been  made  in  the  direction  of  a  centralized  state 
administration.  In  New  York  we  now  have  under  the  law  of 
1915  at  all  events  a-  distinct  step  in  the  direction  of  more  effi- 
cient fiscal  administration.  Of  greater  significance  is  the 
fact  that  the  situation  has  been  entirely  altered  by  the  intro- 
duction of  the  federal  income  tax.  We  have  now  gotten  people, 
and  especially  business  people,  accustomed  to  an  income  tax; 
and  while  there  are  still  grave  problems  to  be  solved  and  im- 
provements to  be  secured,  it  may  be  stated,  without  fear  of 
contradiction,  that  the  income  tax  has  come  to  stay  and  that 
in  principle  it  is  not  seriously  opposed  by  the  community. 
With  the  existence  of  this  new  tax,  which  is  successful  so  far 
as  it  goes,  there  arises  the  hitherto  entirely  unexpected  pros- 
pect of  a  state  income  tax  being  able  to  lean  up  against  the 
federal  tax,  so  as  to  avail  itself  of  the  federal  returns  and  to 
be  able  in  this  way  to  minimize  a  great  part  of  the  difficulties 

*  The  earlier  attitude  of  the  author  in  deprecating  state  income  taxes 
while  urging  a  federal  income  tax  may  be  seen  in  the  1911  and  1913  editions 
of  his  work  entitled  The  Income  Tax, 


, 


If 


652 


ESSAYS  IN  TAXATION 


I 

ii 


!■! 


I« 


which  would  otherwise  attach  to  an  independent  state  income 
tax. 

An  example  of  what  we  mean— and  it  is  noteworthy  as  being 
the  pioneer  in  this  comitry— is  the  Connecticut  law  of  1915 
imposing  a  state  tax  on  business  corporations.  When  the  pres- 
ent writer  was  summoned  by  the  Connecticut  manufacturers 
to  advise  them,  he  found  them  up  in  arms  against  the  propo- 
sition to  introduce  into  their  state  the  Rhode  Island  system 
of  corporate-excess  taxation  which  had  only  recently  been 
adopted  there.  It  was  our  good  fortune  to  be  able  to  advise 
them  as  well  as  the  legislature  to  prefer  to  any  scheme  of 
property  tax  a  system  of  taxes  on  business  income  based  upon 
the  federal  law.  Such  a  system  was  finally  worked  out  by 
Commissioner  Corbin  of  Connecticut,  and  the  result  was  a 
law  whereby  business  corporations  in  Connecticut  duplicate 
for  state  purposes  the  returns  made  by  them  to  the  federal 
government. 

Our  suggestion,  therefore,  is  that  in  New  York  as  well  as  in 
other  states  which  are  ready  for  this  next  step,  the  entering 
wedge  which  we  find  in  Connecticut  should  be  pushed  further 
in,  and  that  an  income  tax  should  be  assessed  by  the  state 
tax  commission  according  to  a  law  which  would  be  largely 
patterned  on  the  federal  act  and  which  would  require  as  far 
as  practicable  a  duplication  of  the  returns  handed  in  to  the 
federal  government. 

New  York  is  in  fact  now  even  better  fitted  for  the  introduc- 
tion of  such  a  system  than  are  some  of  the  other  states.  For 
so  large  a  part  of  all  individual  and  corporate  incomes  is 
received  in  New  York  that  even  a  very  small  rate  would  yield 
a  large  additional  revenue.  Even  assuming  that  only  an  addi- 
tional normal  tax  of  one  per  cent  were  levied  for  state  purposes 
and  another  one  per  cent  for  municipal  purposes  for  New 
York  City,  the  added  revenues  would  yield  an  income  entirely 
adequate  to  the  present  and  future  fiscal  needs  of  the  state  and 
city  and  would  render  unnecessary  the  re-imposition  of  any 
so-called  direct  state  tax.  What  is  true  of  New  York  is  true 
to  a  large  extent  of  the  other  prominent  industrial  states; 
and  even  in  the  remaining  states,  which  are  ready  for  the 
next  step  of  such  an  income  tax,  the  income  tax  might, 
especially  if  the  exemption  were  lowered,  prove  to  be  at 
least  an  acceptable  substitute  for  the  personal  property 
tax. 


THE  NEXT  STEP  IN  TAX  REFORM  .    653 

KoT^  adoption  of  any  such  plan  would  of  course  have  to 
be  thought  out  very  carefully. 

h.'^n?  'T  ""^  ^^''f'''''  ^""^  '*^*^  ^'  ^^^  ^^^^1  purposes  should 
be  only  the  normal  rate  of  one  per  cent.  If  a  graduated  scale 
were  introduced,  as  in  the  federal  tax,  it  might  easily  happen 
that  the  combmed  federal,  state  and  municipal  taxes  on 
large  mcomes  would  reach  a  figure  which  would  probably 
be  considered  grievous  or  even  confiscatory.  A  one  per  cent 
tax  for  state  purposes,  or  at  the  outside  a  two  per  cent,  part 
of  which  might  be  returned  to  the  localities,  would  be  as  much 
as  It  would  be  prudent  to  add  to  the  federal  tax 

On  the  other  hand,  the  high  exemption  which  is  now  granted 
under  the  federal  law  ought  to  be  reduced.    The  limit  of  ex- 
emption  should   certainly  for  state  and   local   purposes    be 
brought  down  to  at  least  $2,000,  and  perhaps  even  to  SI  500 
J^or   whatever   may   be  said  as  to  the  desirability  of  making 
large  exemptions  in  the  federal  tax  in  order  to  serve  as  a  make- 
weight to  the  internal  revenue  and  tariff  taxes,  the  argument 
would  not  apply  to  state  and  local  taxation  where  there  are 
tew.  If  any,  taxes  on  consumption.    If,  however,  the  limit  of 
exemption  were  reduced,  the  revenue  would  be  correspond- 
ingly augmented.     Here  again,  the  administration  of  the  law 
would  be  greatly  facilitated  by  an  amendment  to  the  federal 
act  reqmnng  all  persons  with  a  gross  income  (not  a  net  in- 
come) not  exceeding  the  minimum  exemption  to  make  returns. 
This  would  m  all  hkehhood  render  unnecessary  few  if  any 
new  or  additional  returns  to  the  state  officials 

An  important  point  is  as  to  who  should  be  subjected  to 
such  an  income  tax.  This  phase  of  the  subject  is  really  the 
most  difficult.  It  has  three  different  aspects:  (1)  affecting  the 
residence  of  the  taxpayer;  (2)  dealing  with  the  proportion 
of  mcome  subject  to  state  law;  and  (3)  having  reference  to 
the  relation  of  mdividual  to  corporate  taxation.  Let  us  say 
a  word  about  each  of  these  points. 

AU  incomes  are  in  last  resort  received  by  individuals  and, 
on  the  other  hand,  all  incomes  are  derived  either  from  prop- 
erty,  from  earnings  apart  from  property,  such  as  professional 
salaries,  or  from  exertions  or  relations  which  may  or  may  not 
be  connected  with  property  and  which  are  usually  summed 
up  under  the  general  name  of  business.  The  difficulty  arises 
trom  the  fact  that  the  source  and  the  recipient  of  the  income 
are  not  cotermmous.    The  one  may  be  within  the  state   the 


1 


I 


If 


Ii  ' 


654    . 


ESSAYS  IN  TAXATION 


:>^ 


other  without  the  state.  In  a  federal  income  tax,  these  prob- 
lems arise  only  in  international  relations  and  are  of  minor 
importance.  But  within  the  several  commonwealths  of  a 
union  or  federation,  the  subject  assumes  grave  dimensions. 

From  the  ideal  point  of  view  an  income  tax  might  be  con- 
sidered as  a  strictly  personal  tax,  and  the  recipient  of  the 
income  would  then  pay  a  tax  in  accordance  with  the  income 
received.  But  under  existing  conditions,  both  political  and 
legal,  such  a  theory  is  inapplicable  to  a  state  income  tax.  We 
should  have  the  same  difficulties  that  now  confront  us  in  the 
general  property  tax,  where  the  controlling  consideration 
is  the  legal  residence  of  the  tax  payer.  It  is  therefore  essential 
to  adopt  another  theory  of  the  income  tax;  the  theory,  that 
the  tax  is  imposed  not  only  on  the  recipient,  but  also  on  the 
source  of  the  income,  making  provision,  as  we  shall  see  later, 
for  the  avoidance  of  double  taxation.  In  other  words,  just 
as  we  sometimes  speak  of  a  property  tax  being  imposed  either 
upon  the  property  or  upon  the  property  owner,  so  we  can 
conceive  of  the  income  tax  as  a  tax  either  on  the  income  or 
on  the  recipient  of  the  income.  If  the  latter  is  called  a  tax 
on  the  person,  the  former  may  be  called  a  tax  on  the  thing, 
that  is  on  the  income  irrespective  of  the  recipient.  The  one 
would  be  a  personal  tax,  the  other  would  be  an  impersonal  tax. 

This  distinction  is  of  the  utmost  importance,  for  it  would 
otherwise  be  impossible  for  a  state  to  reach  incomes  which 
are  earned  or  derived  within  the  state  and  which  are  finally 
paid  over  to  individuals  having  a  residence  outside  of  the  state. 
With  this  double  conception  of  the  income  tax,  however,  which 
is  in  harmony  with  the  jurisprudence  of  the  subject  as  thus 
far  elaborated  in  the  United  States,  the  solution  of  this  par- 
ticular difficulty  is  simplified.  The  income  tax  must  be  treated 
not  only  as  a  tax  upon  the  incomes  of  legal  residents  of  the 
state,  but  also  as  a  tax  upon  all  incomes  earned  or  derived 
within  the  state,  irrespective  of  the  legal  residence  of  the 
recipient.  In  the  latter  aspect  it  might  be  called  a  business 
tax;  but  we  hesitate  to  use  this  term  because  it  is  not  broad 
enough,  and  because  the  income  may  be  received  by  some- 
one who  is  technically  not  in  business  at  all.  We  prefer  the 
verbal  distinction  between  a  tax  on  the  source  and  on  the 
recipient  of  the  income. 

The  practical  result  is  that  there  would  be  subject  to  a  state 
income  tax  not  only  all  the  persons  legally  resident  within 


V! 


THE  NEXT  STEP  IN  TAX  REFORM  655 

the  state,  but  also  all  incomes  earned  or  received  within  the 
state,  whether  these  incomes  are  derived  from  property  within 
the  state,  from  business  carried  on  within  the  state,  or  from 
relations  or  privileges  existing  within  the  state. 

While  the  administrative  difficulties   of  such   a  dual  in- 
come tax  would  not  be  great,  they  would  be  largely  diminished 
by  another  suggested  alteration  in  the  federal  tax.     In  the 
lirst  year  of  the  operation  of  the  federal  law,  returns  were 
made  by  mdividuals  at  their  place  of  business.    In  the  second 
year,  the  option  was  given  of  making  the  returns  either  at  the 
place  of  business  or  at  the  place  of  residence.     It  would  be 
a  comparatively  simple  matter  for  the  federal  law  to  require 
a  return  of  the  state  or  states  where  the  income  was  derived 
as  well  as  of  the  legal  residence  of  the  recipient.    This  would 
afford  an  effective  control  of  the  returns.     In  a  metropoUs 
like  that  of  New  York,  for  instance,  where  a  large  part  of  the 
income  earned  within  the  city  is  received  by  non-residents 
this   problem   is   of  special   importance.     Almost   every  im- 
portant income  tax  in  the  worid,  it  may  be  said,  includes  this 
double  aspect  of  income. 

It  is  obvious,  however,  that  if  we  tax  both  incomes  earned 
and  incomes  finaUy  received  within  the  state,  some  rule  must 
be  laid  down  as  to  the  relative  proportion  to  be  taken  by 
each  taxmg  authority.     We  thus  come  to  the  second  of  the 
pomts  mentioned  above.    So  far  as  the  income  from  real  estate 
IS  concerned,  the  problem  need  not  give  us  any  trouble   for 
under  the  accepted  principles  of  American  jurisprudence 'and 
ot  justice  the  income  from  real  estate  ought  to  be  apportioned 
to  the  state  of  its  location.    In  the  case  of  business  incomes 
however,  some  method  must  be  devised  for  taxing  only  so 
much  of  the  mcome  as  is  actually  received  or  derived  within 
the  state.    It  is  here  that  we  shall  need  some  federal  law   or 
some  decision  of  the  supreme  court,  in  order  to  bring  about 
complete  uniformity.     As   a  matter  of  fact,   several   states 
including  New  York  already  apply  the  principle  in  the  taxa- 
tion of  corporations  by  utilizing  the  criterion  of  proportionate 
mileage  or  proportionate  assets  or  proportionate  capital  em- 
ployed withm  the  state.    And  as  long  as  the  principle  of  allo- 
cation IS  accepted,  the  exact  method  of  devising  a  practical 
scheme  may  safely  be  left  to  the  future. 
^   If,  however,  the  suggestion  is  adopted,  permitting  munic- 
ipahties  to  levy  an  additional  income  tax  under  state  law,  or 


656 


ESSAYS  IN  TAXATION 


M 


■1:^ 


m 


I 


distributing  to  localities  in  general  a  percentage  of  the  state 
income  tax,  it  would  l)ecome  necessary  to  provide  for  a  fur- 
ther apportionment  of  income  within  the  states  themselves. 
If  New  York  City  for  instance,  were  to  levy  an  additional 
income  tax,  the  question  would  arise  in  the  case  of  New  York 
business  men  living  in  Westchester  County,  as  to  how  much 
tax  they  should  pay  in  New  York.  This  should  of  course 
be  a  matter  for  state  law  to  regulate;  and  almost  any  rough 
approximation  to  equality  would  be  adequate.  It  might, 
for  instance,  be  provided  in  the  law  that  in  such  cases  two- 
thirds  of  the  tax  should  accrue  to  the  place  where  the  in- 
come is  earned  and  that  one-third  should  be  handed  over  to 
the  place  of  legal  residence,  or  the  distribution  of  the  state 
tax  to  the  localities  might  be  on  the  basis  of  assessed  valua- 
tion of  real  estate,  which  would  have  the  great  advantage  of 
causing  the  localities  to  increase  their  assessed  values,  thus 
working  in  precisely  the  opposite  direction  from  the  state 
tax  on  property,  which  notoriously  leads  to  under-assessment. 

The  third  point  adverted  to  above  is  the  relation  of  in- 
dividual and  corporate  taxation.  Here  again  we  see  the  ne- 
cessity of  the  dual  conception  of  income.  If  the  income  tax 
be  conceived  of  simply  as  a  tax  on  the  ultimate  recipient, 
no  tax  on  corporations  would  be  legitimate.  On  the  other 
hand,  if  the  tax  be  considered  one  on  the  source  of  the  in- 
come as  well,  a  tax  on  the  income  of  the  corporation  as  well 
as  on  the  dividends  received  by  the  stockholder  would  be 
entirely  legitimate  if  the  corporation  tax  be  regarded  as  an 
impersonal  tax.  Especially  would  tliis  be  true  if  the  cor- 
porate income  tax  were  extended  to  all  business  concerns. 
We  should  then  have  an  impersonal  tax  side  by  side  with  a 
personal  tax. 

Whether  the  income  tax  should  be  appUed  to  corporations 
in  those  states  which  already  have  a  fairly  successful  system 
of  corporation  taxes  is  a  matter  open  to  debate.  In  New 
York  State,  for  example,  ordinary  manufacturing  corporations 
are  to  a  large  extent,  under  the  practical  construction  of  the 
law,  exempt  from  state  taxation.  There  is  no  compelling  reason 
why  they  should  not  be  subject  to  a  state  income  tax  under 
the  conditions  mentioned  above.  So  far  as  the  public-service 
corporations,  however,  are  concerne<l,  New  York  already 
derives  a  large  revenue  therefrom;  and  while  there  is  no  doubt 
that  a  reform  of  the  state  tax  on  corporations  is  entirely  de- 


I 


THE  NEXT  STEP  IN  TAX  REFORM  657 

sirable,  it  nii^ht  be  just  as  well,  in  order  not  to  multiply  diffi- 
culties, to  exempt  them  from  the  income  tax.    M  corporations 
however   are  still  subject  in  New  York  to  local  taxatTon  on 
their  entire  property  tax.     The  complications  connected  with 
this  as  leadmg  to  the  adoption  of  the  involved  franchise  tax 
are  well  known.    It  would  be  a  great  step  in  advance  if  there 
could  be  substituted  for  this  local  tax  on  pereonal  property  a 
local  mcome  tax  to  be  assessed  by  the  state  board  and  to  re- 
place the  franchise  tax  as  well.    This  would  greatly  diminish 
the  objections  on  the  part  of  local  communities  which  now 
denye   a   substantial   revenue   from   corporate   taxes.     That 
in  New  York  as  well  as  in  many  other  states  the  corporation 
taxes,  both  state  and  local,  will  ultimately  be  put  on  an  in- 
come basis,  IS  scarcely  open  to  doubt.    But  as  to  the  tempo  of 
development,  there  may  be  reasonable  grounds  for  discussion 

It  IS  obvious  from  what  has  been  said  that  it  would  be  in 
eveiy  way  desirable  to  abolish  entirely  the  taxation  of  ner- 
sonal  property  and  to  have  the  income  tax  serve  as  a  sub- 
stitute therefor.     If  this  is  an  impossibility  for  political  or 
constitutional  reasons,  it  would  be  well  to  consider  the  plan 
already  adopted  in  Wisconsin,  namely,  to  permit  the  deduc- 
tion of  any  taxes  paid  by  individuals  on  personal  property 
from  the  sums  due  for  income  tax.    This  would,  indeed,  still 
necessitate  the  form  of  property  assessment;  but  the  result 
would  virtually  be  the  same.    Moreover,  the  privilege  which 
has  been  suggested  of  permitting  localities  to  choose  an  addi- 
tional mcome  tax  for  local  purposes,  to  be  levied  by  the  state 
would  put  It  entirely  within  the  competency  of  each  city 
town  or  village  to  decide  whether  it  preferred  a  continuance 
of  the  old  general  property  tax,  or  a  substitution  of  the  new 
mcome  tax.    We  might  even  go  further  and,  if  a  local  income 
tax  proved  to  be  poUtically  impossible,  suggest  that  the  munic- 
ipahties   be  permitted,   under   general    state    regulation     to 
select  as  a  substitute  for  the  personal  property  tax  an  indirect 
mcome  tax  in  the  shape  of  a  habitation  and  an  occupation 

The  adoption  of  some  such  plan,  it  will  be  recognized,  will 
also  accomplish  all  that  is  desirable  in  the  plan  of  separation  of 
sources.  The  controlling  reasons  for  suggesting  the  separa- 
tion of  state  and  local  revenue  have  always  been  to  relegate 
the  taxation  of  real  estate  to  the  localities  and  to  provide  for 
a  centralized  state  administration  of  taxes  on  corporations 


Hi 


658 


ESSAYS  IN  TAXATION 


M 


inheritances  and  the  Uke.  The  adoption  of  a  state  income  tax 
would  really  be  in  hannony  with  this  scheme  of  separation; 
for  real  estate  would  be  exclusively  taxed  by  the  local  com- 
munities, while  corporations  and  inheritances  would  be  as- 
sessed by  the  state  authorities.  The  mere  fact  that  the  in- 
come tax  might  be  utilized  for  both  state  and  local  purposes 
would  in  reaUty  not  derogate  from  the  principle  involved. 
For  the  basis  of  the  tax  would  still  be  a  state  basis,  even  though 
additions  were  permissible  to  the  locaUties.  Such  a  system 
should  not  be  deemed  inimical  to  the  real  principle  under- 
lying the  theory  of  separation  of  source,  any  more  than  the 
existing  apportionment  of  the  mortgage  recording  tax  in  New 
York  or  of  certain  corporation  taxes  in  other  states  ought  to 
be  deemed  inimical  to  the  principle.  Separation  of  source 
properly  conceived,  means  primarily  separation  of  the  assess- 
ment of  source. 

From  the  above  review  it  will  be  seen  that  we  are  slowly 
but  surely  being  pushed  into  a  position  where  property  is  to 
be  replaced  by  income  as  the  chief  basis  of  taxable  abiUty. 
If  in  New  York  public  opinion  is  not  yet  ready  to  declare  it- 
self in  favor  of  such  a  revolution  as  is  impUed  in  the  income 
tax,  it  is  entirely  likely  that  we  shall  proceed  for  a  time  to  fol- 
low the  plan  pursued  for  over  a  century  by  France,  when 
she  abandoned  her  old  personal  taxes — that  is,  of  attempting 
to  reach  the  income  indirectly  rather  than  directly  by  a  series 
of  taxes  on  things  rather  than  on  persons, — such  as  habitation 
taxes,  occupation  taxes,  business  Hcenses  and  the  like.  For 
with  the  increasing  burdens  of  modem  life,  it  is  fair  to  assume 
that  real  estate  alone  will  not  be  permitted  to  endure  the 
pressure.  Until  the  recent  adoption  of  the  federal  income 
tax,  the  outlook  for  a  successful  state  income  tax  was  ex- 
ceedingly slight;  now,  however,  the  situation  is  entirely  altered, 
and  is  full  of  promise. 

There  are  only  two  points  that  we  should  like  to  emphasize 
in  closing.  The  one  is  that  if  we  are  to  utilize  the  income  tax 
as  a  promising  source  both  of  greater  revenue  and  of  greater 
equality  for  state  and  local  purposes,  it  is  important  that 
the  rate  of  the  income  tax  should  be  kept  low.  For  if  there 
should  be  a  real  competition  between  the  federal  and  the 
state  governments  for  the  same  source  of  revenue,  the  results 
could  only  be  disastrous.  This  leads  to  the  second  point, 
that  it  behooves  us  to  take  up  anew,  and  from  a  broader  point 


f 


THE  NEXT  STEP  IN  TAX  REFORM  659 

fc'  UxT"  W^ir  °'  ^■^t'^"^*'  "^«*^  °^  direct  and 
umirect  taxes.    With  the  weU-mgh  exclusive  reliance  of  the 

TtZ'SontlTT'  ^"*  "'^'^  ^•^^  growing  tendent 
»Lr  fv  .  ^^®'"^'  government  to  emphasize  the  orev- 
a  ence  of  direct  taxation,  there  is  a  grave  danger  of  our  over 
stepping  the  Lmit.  All  history  ha.  shown  that  a  certain  baW 
must  be  kept  between  direct  and  indirect  taxe/  A«^ho  ! 
re  onner  Gladstone  told  us  over  a  hafa  centu"  a^  we  mS 
with  thl       '*  ^"'^  '"'^^•^*  *^^*'°"  ^  two  att^acKsZ 

any  uXerX  Wv,l  k'  !"  ™"°"espects,  and  not  justifying 
any  untnendly  rivalry  between   their  admirers      We  arp^  in 

I'Se^  hT'  *f  rr "'  ^p^^-"*^'  -h^«h  Z\Z,Ty 

^Sml  and  of'^  f  """"•  ^^  "'*'' '"  *''«  domain  both 
a  teSfon  in  .1  I  f '^t^  t'^ation  to  devote  considerably  more 
For  wr^hTlI    ?/"*"'■'  ^  ^^^  possibilities  of  indirect  taxation 

Scur  the  d!nl    T'  ""*  °"'^  '^°'"P"<''^*«  *»>«  «it"-tion  bu 
incur  the  danger  of  a  senous  reaction  from  the  ensuing  pt 

aggerat^  burden  of  direct  taxation;  and  shall  renr  stni 
SiSefdSrr"'""  'T  "-^'^^^  to^lrtalSn" 
ventSr^lfTh^neTgrU^r;  ^^J^'^  ^  ''- 


CHAPTER  XXI 


H 


lll. 

1  < 

rV 

m 


THE  RELATIONS  OF  FEDERAL,  STATE  AND  LOCAL  REVENUES  * 

I.  The  Problem 

It  is  only  in  modem  times  that  the  fiscal  inter-relations 
between  central  and  local  governments  have  become  of  im- 
portance. In  ordinary  states  the  question  is  one  of  divergence 
between  national  revenues  and  local  revenues.  In  federal 
states  the  problem  is  further  complicated  by  the  interposition 
of  the  commonwealth  or  state  between  the  federal  or  national 
government  on  the  one  hand  and  the  local  government  on 
the  other. 

Government  revenues  are  the  counterpart  of  government  ex- 
penditures, and  these  depend  primarily  upon  the  character  and 
the  extent  of  government  functions.  From  this  point  of  view, 
the  fiscal  relations  in  question  are  of  considerable  complexity. 
All  expenditures  were  originally  local  in  character.  Economic 
life  was  at  the  outset  based  upon  a  local  economy,  and  what 
little  money  was  spent  was  both  raised  and  expended  prima- 
rily for  local  purposes.  It  was  only  when  the  national  state 
developed  as  a  result  of  the  profound  economic  changes  of 
the  later  middle  ages  that  national  expenditures  now  ap- 
peared on  the  scene,  and  especially  for  the  purposes  of  the 
army  and  the  navy.  Somewhat  later  there  came  a  two-fold 
development  as  a  consequence  on  the  one  hand  of  trade  and 
commerce  and  on  the  other  of  democracy. 

Trade  and  conmierce  were  responsible  for  the  growth  of  ex- 
penditures connected  with  transportation,  and  especially  with 

*  The  earlier  part  of  this  chapter  is  based  upon  a  paper  read  before  the 
Second  Pan-American  Congress  in  Washington,  December,  1915,  and 
published  in  the  Proceedings  of  the  Second  Pan-American  Scientific  Congress, 
vol.  xi.  1917, — pp.  79-87.  The  latter  part  of  the  chapter  is  based  upon  the 
"Report  of  the  Committee  on  the  Relations  of  State  and  Federal  Taxation" 
made  to  the  New  York  State  Tax  Association  in  1917  and  published  in 
the  Addresses  and  Proceedings,  Seventh  State  Conference  on  Taxation,  Al- 
bany, 1917,  pp.  26-49. 

660 


I 


FEDERAL,  STATE  AND  LOCAL  REVENUES        661 

good  roads.     Although  this  was  accomplished  in  part  by  the 
localities,  more  and  more  supervision  was  exercised  by  the 
central  governiiKnits,  so  that  the  expenditures  of  the  central 
government  for  such  purposes  now  grew  to  considerable  pro- 
portions.    The  same  was  true  still  later  when,  as  in  France 
the  construction  of  canals  called  for  large  outlays.    The  result 
of  the  movement  down  to  the  beginning  of  the  nineteenth 
century  was  that   the  great   burden   of  expenditure  resting 
upon  the  individual  was  primarily  for  the  purposes  of  the 
central  government,  and  that  even  in  England  the  local  ex- 
penditures were  Imiited  in  large  measure  to  the  care  of  the 
poor,  with  very  slight  addition  as  for  roads  and  other  mis- 
cellaneous purposes. 

At  the  beginning  of  the  nineteenth  century,  the  democratic 
movement,  which  was  the  result  of  the  industrial  revolution 
altered  the  situation  in  two  ways.     In  the  first  place,  there 
now  came  a  rapid  increase  of  expenditures  for  education,  for 
improving  the  health  and  sanitation  of  the  community  and 
tinally,  for  developing  the  general  welfare  in  its  stiU  wider 
aspects.     In  the  second  place,  these  expenditures  were  over- 
whelmmgly  local  in  character,  although  there  has  also  been  a 
tendency  of  late  for  the  central  governments  to  assume  to  an 
mcreasmg  extent  some  of  the  same  functions.     The  conse- 
quence has  been  that,  on  the  whole,  in  the  most  recent  period 
local  expenditures  have  become  in  many  ways  quite  as  im- 
portant as,  even  if  not  more  important  than,  the  central  ex- 
penditures. 

While  there  has  been  this  general  movement,  the  situation 
has  been  complicated  by  the  fact  that  government  functions 
and  expenditures  have  been  variously  apportioned  in  different 
states.  In  some  states  certain  functions  have  been  graduaUy 
relegated  to  the  local  communities;  in  others,  the  contrary  is 
the  case. 

In  the  Anglo-Saxon  communities,  there  has  been  a  growing 
tendency  for  a  central  control  over  the  local  functions  of  govern- 
ment; m  others,  as  in  France  and  Italy,  there  has  been  a  tend- 
ency toward  a  greater  decentralization.  Moreover  in  all 
federal  states  a  further  complication  has  been  introduced  in 
that  in  the  separate  commonwealths  or  states  that  stand  be- 
tween the  localities  and  the  federal  government  there  has 
been  a  mixed  movement  both  toward  centralization  and  toward 
decentralization;  so  that  in  some  conamunities  the  one  tendency 


662 


ESSAYS  IN  TAXATION 


»r 


•'(I '  t 


preponderates,  in  other  communities  the  contrary.  In  the 
United  States,  for  instance,  the  states  have  been  gradually 
assunung  the  control  of  several  functions  that  were  originally 
left  to  the  localities,  as  in  the  case  of  highroads,  hospitals, 
asylums,  state  constabulary,  and  the  like.  On  the  other  handi 
the  states  liave  been  losing  some  of  their  functions  to  the 
central  government,  as  in  the  case  of  the  growing  federal 
control  over  railroads  and  various  forms  of  business  enter- 
prises; and  we  now  hear  insistent  demands  for  a  federal  quaran- 
tine, and  for  federal  control  of  labor  conditions.  As  a  conse- 
quence, there  is  at  present  no  clear-cut  line  between  federal, 
state  and  local  functions  and  expenditures. 

Since  the  revenues  of  government  stand  in  a  certain  relation 
to  expenditures,  the  same  difficulties  that  have  arisen  in  the 
case  of  expenditures  reappear  in  that  of  revenues.  In  fact, 
there  are  even  more  complications  in  revenue  than  in  expendi- 
ture because  of  the  possibility,  as  we  shall  see,  of  expenditures 
by  one  form  of  government  being  defrayed  out  of  the  rev- 
enues derived  in  part  or  in  whole  from  another  form  of  govern- 
ment. The  whole  subject  of  public  revenues  is  therefore 
bound  up  with  the  problem  of  a  proper  relation  between  central 
and  local  finance,  or  in  the  case  of  federal  governments  be- 
tween federal,  state  and  local  finance. 

As  a  preliminary  to  a  discussion  of  the  fiscal  relations  of 
central  and  local  governments,  it  is  necessary  to  recall  the 
two  controlling  principles  of  public  revenues.     These,  as  is 
well  known,  are,  on  the  one  hand,  the  principle  of  ability  to 
pay  and,  on  the  other  hand,  that  of  benefit  conferred.    It  need 
not  be  pointed  out  that  the  latter  was  the  one  long  accepted 
by  pul)Ucists,  and  it  is  only  in  recent  times,  with  the  emer- 
gence of  modern  democracy  and  with  the  insistence  on  the 
specifically  social  aspects  of  public  finance,  that  the  principle 
of  ability  to  pay  has  come  to  the  front.     The  most  recent 
analysis  of  the  subject,  however,  discloses  the  legitimacy  of 
both  principles,  although  it  is  careful  to  relegate  each  principle 
to  its  proper  sphere.    It  is  now  well  understood,  for  instance, 
that  taxes  in  general  must  be  framed  and  apportioned  ac- 
cording to  the  principle  of  ability  to  pay;  while  most  of  the 
remaining  categories  of  public  revenues,  such  as  fees,  special 
assessments,  and  prices  of  all  kinds  for  governmental  services 
conform  to  the  principle  of  benefits  conferred  or  cost  incurred. 
While  this  demarcation  is  now  generally  accepted,  it  is  none 


FEDERAL,  STATE  AND  LOCAL  REVENUES        663 

nnif  u  T  .  ^  ^^''^''  ^^^  «^"^^  imposts  on  land  can  bp 
upheld  almost  as  well  on  the  principle  of  benefits  Is  on  ^h«t 
of  abhty  to  pay;  while  other  payments,  hkeTnher  tane"  ^^^^^^ 
wh  ch  m  some  countries  (like  the  United  Stat^  are  S^^ 
mchided  under  the  head  of  payments  made  for  l^neK 
P^yileges,  correspond  in  reality  to  the  principle  of  aWfitv 
Without  attempting  to  pursue  further  this  invitini  S  of 

^"^Mi^^^  '^  point  otrhafthere 

IS  a  jurisdictional  division  corresponding  roughly  to  the  abovo 

oiS  H  P"!rP^^^^hat  is  to  say,  the  chief  LL  of  reven^^^ 
predicated  on  the  principle  of  benefit  is  to  be  found  toTav  in 
the  local  divisions,  while  the  chief  home  of  revenues  baseTon 
the  pnnciple  of  ability  to  pay  is  to  be  found  in  the  Tore  central 
gove.nni.ntal  jurisdictions.     The  line  is,  indeed!  not  enfej 
sharp,  for  we  find,  on  the  one  hand,  some  fees  levied  and  nol 
a  few  mdustries  or  enterprises  conducted  by  central  gove  n 
ments;  while,  on  the  other  hand,  certain  local  taxes  are  to  b« 
explamed  primarily  on  the  principle  of  ability  to  Jay      But 
as  a  general  pnnciple  it  is  true  that  there  exists  in  mZi  coun 
tries  to-day  a  larger  field  for  the  principle  of  bL^s  in  the 

II.  The  Five  Methods 

••n  ll'^V"'?  *°,  *"  ^"""'-^^'^  °^  *•>"  ''^"tual  conditions  to  be  found 
m  the  fiscal  relations  of  central  and  local  governments  and  if 
we  confine  our  attention  to  what  is  the  most  important  part 
of  the  subject,  viz.,  the  revenue  from  taxes  and  prfmarHy  from 
taxes  which  may  be  upheld  on  the  principle  of  a  ihtv  t^ 
pay,  wo  shall  see  that  there  are  no  less  than  five  dffierent 
methods  actually  employed.  These  are  as  follows- 
+i„n   f     .1  taxes  are  assessed  by  local  authorities,  with  addi- 

metho"  n'  Z  T'  ''"''"'  ^o.en^^ent.  This  is  ihe  common 
method  m  the  American  commonwealths,  where  the  local 
revenues  are  derived,  to  an  overwhelming  extent  from  the 
general  property  tax  levied  upon  real  and%e:.onal  properly 
alike.  The  rate  of  the  tax  for  purely  local  purposes  is  ordi- 
narily amvcKl  at  by  dividing  the  assessed  valuation  of  the  p^t 

poses.     To  this  local  rate  there  are  added  rates  for  county 


ill 


I 


I     f 


664 


ESSAYS  IN  TAXATION 


M 


III 


as  well  as  for  state  purposes,  each  of  which  is  ascertained  by 
dividing  the  assessed  valuation  of  the  property  in  the  locality 
by  the  amount  needed  for  the  expenses  of  the  county  and 
of  the  state  respectively.  The  same  tax,  assessed  by  the  local 
officials— yi2.,  the  general  property  tax,— is  thus  utilized  for  both 
local  and  central  purposes. 

(B)  The  tax  is  assessed  by  the  central  authorities  with 
additions  for  local  purposes.  This  is  the  reverse  of  the  system 
last  mentioned.  It  was,  until  the  great  reforms  of  1917-1920, 
to  be  found  in  France,  whose  example  has  been  copied  in  not 
a  few  states.  In  France  there  were  four  taxes  levied  for  state 
purposes:  the  land  and  buildings  tax,  the  patentes  or  business 
tax,  the  personelle  et  moUliere  or  personal  tax,  and  finally  the 
door  and  window  tax.  The  local  revenues  were  obtained  by 
adding  a  certain  percentage,  known  as  the  centimes  additionels, 
to  each  of  these  state  taxes.  There  were,  indeed,  other  rev- 
enues, chiefly  from  indirect  taxes  for  state  purposes,  and 
from  the  octrois  for  local  purposes;  but  the  fact  remains  that 
so  far  as  the  bulk  of  local  revenues  is  concerned,  they  were 
derived  from  this  simple  addition  to  the  direct  state  taxes. 
Under  the  new  regime,  where  the  four  impersonal  taxes  have 
been  replaced  by  the  income  tax,  the  local  revenues  consist  of 
cerUimes  additionels  to  the  state  income  tax. 

(C)  The  separation  of  the  sources  of  revenue;  that  is,  certain 
taxes  are  utilized  for  central,  and  others  for  local  purposes. 
This  separation  again  is  either  total  or  partial.  A  partial 
separation  is  very  common.  Virtually  all  nations,  for  instance, 
reserve  customs  duties,  whether  import  or  export  duties,  for 
the  central  government.  Many  nations  again  reserve  definite 
classes  of  indirect  taxes  for  the  central  government.  In  the 
United  States,  for  instance,  there  are  only  one  or  tw(5  excep- 
tions to  the  general  rule  that  the  indirect  taxes  are  devoted 
to  federal  purposes,  in  the  shape  of  the  Internal  Revenue. 
The  same  is  true,  although  to  a  somewhat  slighter  extent,  of 
the  German  Empire.  Even  in  regard  to  direct  taxes,  however, 
the  principle  of  separation  of  source  is  not  infrequently  found! 
In  Great  Britain,  for  instance,  the  income  tax  is  utilized  for 
the  nation,  while  the  local  revenues  are  derived  almost  ex- 
clusively from  the  local  rates  or  real  estate  taxes.  Again,  in 
Germany,  the  so-called  taxes  on  yield  (Edrags'Steuern),  which 
correspond  to  the  four  direct  taxes  until  recently  levied  in 
France,  are,  since  the  reforms  of  1893-1895,'reserved  exclusively 


I 


FEDERAL,  STATE  AND  LOCAL  REVENUES       665 
for  the  local  governments,  although  for  the  sake  of  better 

Unrrs?«  "".V  T  T  ^**"  "^'"'^^'^  ^y  th«  states     In  the 
United  States  this  tendency  is  also  visible.    In  not  a  few  com 

monwealths  the  inheritance  tax  and   even   the  co  pomtTn 

taxes  are  now  allocated  to  the  state,  while  the  local  Zem 

ments  depend  more  and  more  upon  the  property  t^Tn 

New  York  this  policy  has  been  carried  to  such  an  extent  that 

for  a  number  of  years  during  the  fii^t  decade  of  the  p  eSnt 

century,  it  became  unnecessary  to  levy  any  so^a  iS  dire^or 

property  tax  as  an  addition  to  the  local  tax     In™ ornL  th' 

same  pnnciple  has  been  carried  to  the  utmost  limit,  s7  hat  there 

I    l°i  I^''  .'"''*'''"  °^  ^^^  yield;  that  is,  the  revenues  are  rol 
ected  by  the  central  authorities,  but  L  portion  of  the  yiS 
^  assigned  to  the  localities.     This  is  true  of   the   stcSS 

SkinsomeoSA    ''•°"'-     ^n    analogous    condition 
prevails  m  some  of  the  Amencan  commonwealths,  where  rail- 
road or  other  corporation  taxes  are  assessed  and  coUe^L  b' 
the  state  governments,  but  are  then   returned  in  parTto  the 

iretiTn  Tew  5°7.Tr. '"-^-t--  of  a  simirm^thS 
are  seen  in  New  York  in  the  income  tax  and  the  mortgage  tax 

fn7t";t:Irtv"Th'""^''7'.^  ^"^"^  •^^^^-^  ^^^^ 

ana  tne  locality.    The  most  stnkmg  example  of  this  princiole 
however,  is  found  in  Germany  where  the  law  of  1920  Tuts 

ranstTr  :j""''*r!'°\°^  '^^  '"''°'»«'  inheritance  C 
in  ththinr'^X  ""'"^  and  turnover  (Umsatzsteuer  tax^ 
enue  to  thl  L  f  *•»«  empire,  and  assigns  a  portion  of  the  rev- 
enue to  the  states.  This  portion  amounts  to  two-thinls  for  the 
mcome  tax,  twenty  per  cent  for  the  inheritance  tax  fifty  S 

fer  tax"and  fif^"  '"^  t.^r^tyfiye  per  cent)  for  the  hnd  Trans- 
ter  tax,  and  fifteen  per  cent  for  the  turnover  tax.    In  the  last 
case  five  per  cent  must  go  to  the  localities:  in  all  the  other  ca^ 
the  apportionment  to  the  locaUties  is  left  to  the  states  ' 

tral  toTh!  r  r  °^-^"bventions  or  payments  from  the  cen- 
tral to  the  local  governments  or  from  the  local  to  the  central 

TfolT i^Ca^n  r^'n  '"^""''^  °'  '""^  former UtmTs To 
De  tound    n  Canada,  where,  as  a  result  of  the  surrender  bv 

tuTT  r^  •""''  °^  '^'  "^''*  *°  '"^^y  «"«toms  and  exc£ 
duties,  the  Dominion  transfers  annually  large  subvenHoi^ 
to  the  provincial  treasuries.    A  similar  system  is  "forcH 


^' 


il 


666 


ESSAYS  IN  TAXATION 


■h 


I'f 


Australia,  since  the  constitutional  amendment  of  1910,  as  a 
result  of  which  the  Commonwealth,  in  return  for  the  privilege 
of  levying  all  customs  and  excise  revenues,  annually  pays 
over  to  the  separate  states  a  fixed  sum  per  capita.    In  all  these 
cases  the  payments  are  made  by  the  federal  to  the  state  govern- 
ment.   In  other  countries,  however,  the  reverse  system  obtains 
During  the  periotl  of  the  first  Constitution  of  the  United  States 
the  federal  government  was  almost  entirely  supported  by  the 
so-called  requisitions  upon  the  states,  and  until  recently  the 
German  empire  was  still  very  largely  alimented  by  the  so-called 
M^ricular-Beitrdge,  or  contributions  made  by  the  states. 
,/In  comparing  these  five  systems,  it  is  clear  that  the  first, 
and  the  last  possess  obvious  disadvantages.    One  of  the  chief 
diflSculties  connected  with  the  first  system  is  that  the  utiliza- 
tion for  general  state  purposes  of  a  locally  assessed  tax  on 
property  inevitably  leads  to  an  under-assessment  of  the  prop- 
erty.    It  makes  little  difference,   for  instance,   whether  for 
purely  local  purposes  we  have  an  under-assessment  of  prop- 
erty with  a  high  rate,  or  a  full  assessment  with  a  low  rate. 
Since  a  definite  amount  of  revenue  is  needed  for  local  pur- 
poses, and  therefore  a  definite  amount  of  money  must  be 
taken  out  of  the  pockets  of  each  individual,  as  long  as  the 
property  of  all  individuals  is  assessed  in  the  same  proportion, 
it  makes  no  difference  whether  we  have  a  low  or  a  high  rate! 
As  soon,  however,  as  the  assessment  is  utilized  for  state  pur- 
poses, and  the  amount  to  be  raised  is  made  to  depend  upon 
the  assessed  valuation  in  the  county  or  the  locality,  it  is  clear 
that  the  lower  the  local  valuation,  the  less  will  be  the  ag- 
gregate amount  which  the  locality  will  have  to  pay  to  the 
state.    This  is  one  of  the  chief  causes  which  have  led  to  the 
under-assessment  of  property  in  the  American  states,  and  it 
IS  largely  for  this  reason  that  the  movement  is  now  so  pro- 
nounced in  the  United  States  toward  both  a  central  super- 
vision  over  local  assessments  and   an   abandonment  of  the 
local  property  tax  for  state  purposes.    The  first  method  thus 
is  clearly  susceptible  of  improvement.      . 

The  fifth  system,  again,  namely,  that  of  subventions,  is 
only  a  makeshift.  To  have  the  federal  government  depend 
entirely  upon  largesses  from  the  states  is  to  render  it  more 
or  less  impotent,  and  certainly  to  make  it  subordinate  to  the 
states.  That  was  the  result  of  the  American  system  of  requisi- 
tions, and  was  one  of  the  reasons  for  the  growuig  fiscal  complexi- 


FEDERAL,  STATE  AND  WCAL  REVENUES        667 

ties  of  the  German  empire.    On  the  other  h«nH   f«       i     .u 
separate  states  depend  financially  upon  th^^^^^^^^ 
ment  is  to  weight  the  baIancet^^opptite  S 

rv/„i     uv/     .  system    ot    subventions   is    concedpHIv   a 

^Sv  il,l  "^   advantage  is   the  securing   of  greater 

eTate  Wdi^/t'T'"!'"*  of  property,  and  especially  of  rea 

rr:d^t„%?:jru:rrtri^^^^ 

vantage,  so  far  as  concerns  the  reW^trnn^f.  J      ^^"^  '"^' 

^  i.  ih.  g™,„  «»iMi„3  ^^S„„T' "„";"„*:': 

fnS  !  ^^""^u  f/'^'"'.taKes  are  undoubted,  we  must  be  care 

U.e  .Ul.,  „,  Ih.  Me„,  „„„„.,  may  b.  l^C^S-*" 
for  ,t,  puTO,,  »hile  Ih.  „„„,  ,„^  „  Ihe  l.rtSt 

*  Supra,  p.  376. 


668 


ESSAYS  IN   TAXATION 


m 


tions  may  be  inadequate.  There  seems  to  be  no  convincing 
reason  why  the  surplus  of  the  one  kind  of  revenue  should  not  be 
utilized  to  make  good  the  deficit  of  the  other. 

In  short,  while  there  is  much  to  be  said  for  the  principle  of 
separation  of  source,  correctly  interpreted,  we  conclude  that 
in  the  strict  sense  of  the  term  it  is  in  need  of  being  supplemented 
by  other  principles  in  order  to  secure  a  well-rounded  fiscal 
system. 

We  come,  then,  finally  to  the  consideration  of  the  second  and 
the  fourth  systems,  mentioned  above  as  B  and  D. 

The  system  of  a  centrally  assessed  tax  with  additions  for 
local  purposes  has  much  in  its  favor,  especially  when  the  tax 
chosen  is  one  with  a  broad  base.  A  good  example  of  such  a 
system  was  the  Prussian  income  tax,  which  was  administered 
by  the  state,  and  where  additions  up  to  a  certain  percentage 
were  permitted  for  the  use  of  the  localities.  The  advantage  is 
that  the  individual  in  paying  his  tax  bill  gives  a  lump  sum  for 
both  state  and  local  purposes,  and  is  relieved  from  the  an- 
noyance of  separate  returns.  The  same  is  true  of  the  centimes 
additionels  in  France.  The  obvious  danger,  however,  in  such 
a  system  is  that  by  using  the  same  tax  for  both  state  and  local 
purposes  we  run  the  risk  of  increasing  the  rate  to  such  an 
extent  as  to  interfere  with  its  maximum  productivity, — a 
danger  inherent  in  any  system  which  looks  toward  the  single- 
ness rather  than  to  the  multiplicity  of  taxation.  With  this 
warning,  however,  and  on  the  understanding  that  the  system 
must  not  be  pushed  to  an  extreme,  much  may  be  said  for  the 
above  method  of  local  additions  to  centrally  assessed  taxes, 
as  supplementary  to  the  other  methods  in  vogue. 

Finally,  we  come  to  the  principle  of  division  of  yield.  This 
is  the  obvious  result  of  any  particular  source  of  revenue  where 
the  stream  of  income  gushes  forth  so  abundantly  as  to  pro- 
duce more  than  is  needed  for  the  purpose  in  hand,  and  where, 
conversely,  there  is  a  deficiency  elsewhere.  An  example  of 
this  is  afforded  by  the  railway  taxes  in  some  American  com- 
monwealths. It  is  conceded  that  from  every  point  of  view  it 
is  preferable  to  have  the  assessment  of  railways  in  the  hands  of 
central  authorities;  for  the  experience  of  the  American  states 
with  the  local  assessment  of  what  is  essentially  inter-local  or 
extra-local  in  character  has  been  unfortunate.  To  take,  how- 
ever, the  entire  revenue  of  railways  for  state  purposes  would 
be  in  not  a  few  cases  to  rob  the  localities  of  a  share  of  what 


FEDERAL,  STATE  AND  LOCAL  REVENUES        669 
they  have  been  accustomed  to  rely  upon;  and  it  was  thereforP 

m^tTndToSr  '^  ".r"^^  ^'^.  ^^^^^-  ^'  aTtatt:^:: 

ment  and  coLection,  with  a  repartition  of  at  least  a  oart  of 
the  yxeld  among  the  localities.  The  same  point  of  vTew  is 
observable  m  the  German  inheritance  and  incomes  ta^e 
where  for  administrative  and  fiscal  reasons  it  was  found  d^ 
sirable  to  levy  them  as  federal  imposts,  but  where  the  se^ 
arate  states  which  had  been  accustomed  to  depend  upon  those" 

mignt  well  on  the  basis  of  general  economic  considerations 
aliment  both  the  central  and  the  local  treasuries  therH 
strong  reason  for  maintaining  the  principle  of  division  of  yTeld 

the  Lf  an?fif?h    T^^  '^"^""^  ""^^^^^^  ^^  ^^at,  while 

the  first  and  fifth  methods  are  relatively  indefensible,  a  com- 

bmation  of  the  second,  third  and  fourth  methods  affords  a 
reasonable  ground  for  expectation  of  success.       ^^  ^''''''^^  ^ 

III.  The  Choice 
In  deciding  upon  choice  between,  or  a  combination  of,  the 

prmciples.  The  three  prmciples  that  should  guide  in  the 
allocation  of  revenues  as  among  various  tax  jurisdictions  are- 
the  extent  of  the  base  of  the  system,  the  efficiency  of  the  ad: 
ministration,  the  adequacy  of  the  revenue 

The  extent  of  the  base  of  taxation  is  obviously  important 

base.     The  productivity  of  an  inheritance  tax  for  example 
depends  upon  the  number  and  size  of  the  assets  of  decedents 
It  is  clear,  however,  that  the  smaller  the  area,  the  more  variable 

3w£  '"''"""'•  ,/f,^^^^gl^  *«^«  the  death  of  one  wealthy 
mdividual  may  swell  the  revenue  from  the  inheritance  tax  in 
any  one  year  to  a  point  which  may  not  be  reached  again  for 
many  years  to  come.  This  would  be  fatal  to  fiscal  stabHity 
dl^^ft"  ^^"«^,^^f  t^«n/«"W  apply,  although  in  a  somewhat 
diminishing  extent,  as  between  state  and  nation  in  a  federal 
government.  The  larger  the  area,  the  more  regular  the  revenue 
lake,  agam  business  or  corporate  activity,  which  originaUy 
was  local  m  character  but  which  has  now  become  state  and 
even  national  m  character.    Where  the  base  is  so  broad,  any 


I 


I 


670 


ESSAYS  IN  TAXATION 


< 


I 


attempt  to  narrow  the  jurisdiction  is  fraught  with  peril.  In 
the  Middle  Ages,  for  instance,  a  local  or  municipal  tax  on 
personal  property  was  entirely  feasible,  because  of  the  es- 
sentially local  character  of  property.  In  modem  times,  how- 
ever, the  assets  of  a  large  business  and  the  intangible  character 
of  much  of  the  property  have  now  become  national  or  inter- 
national in  scope,  so  much  so  in  fact  as  to  render  fruitless  any 
attempt  to  reach  that  property  by  local  methods;  and  the 
same  consideration  has  led  to  the  abandonment  in  recent  years 
of  any  effort  to  levy  a  purely  local  income  tax. 

Secondly,  the  efficiency  of  the  administration.  Certain  taxes 
like  real  estate  taxes  are  specially  adapted  to  initial  local  ad- 
ministration, because  the  assessment  takes  place  under  the 
eyes  of  the  individual  taxpayer.  In  many  other  cases,  how- 
ever, the  farther  away  we  get  from  local  administration  the 
better  the  chances  not  only  of  securing  expert  officials,  removed 
from  the  dependence  upon  local  prejudice,  but  also  of  making 
allowance  for  certain  inevitable  gaps  in  any  local  adminis- 
tration. When  the  administration,  for  instance,  of  the  liquor 
license  or  excise  tax  in  New  York  was  transferred  from  local 
officials  to  the  state  administration,  the  revenue  was  largely 
increased.  Again,  if  we  have  a  system  of  state  assessment  of 
corporations,  the  difficulty  arises  not  only  as  to  the  allocation 
of  the  due  proportion  of  total  revenues  earned  by  the  cor- 
poration, but  also  of  knowing  what  to  do  with  purely  interstate 
revenues.  In  the  case  of  the  inheritance  tax,  where  a  part 
of  the  revenue  has  l)een  based  upon  the  principle  of  residence 
of  the  decedent,  we  cannot  ignore  the  chance  of  evasion  by 
transferring  the  legal  residence  to  a  state  where  the  tax  does 
not  exist,  or  where  the  rates  are  lower.  Finally,  the  history 
of  the  United  States  particularly  has  shown  that  a  federal 
administration  is  often  more  efficient  than  the  state  adminis- 
tration. Compare,  for  instance,  the  results  displayed  in  the 
construction  of  the  Panama  Canal  with  those  shown  in  the 
construction  and  maintenance  of  the  new  highways  in  New 
York.  The  efficiency  of  central  as  over  against  local  ad- 
ministration depends  not  only  upon  general  political  and  ad- 
ministrative conditions,  but  also  upon  the  constitutional  and 
economic  relations  of  certain  revenues  themselves. 

Thirdly,  the  adequacy  of  the  revenue  in  question  must  not 
be  overlooked.  In  a  certain  jurisdiction  which  is  already  fairly 
well  supplied  with  revenues,  and  where  for  reasons  of  greater 


FEDERAL,  STATE  AND  LOCAL  REVEWES        671 
equality  or  expediency  a  new  source  of  revenue  is  n.Hprl    if 

S'^^n^r '^eonr"  '''''  '''  *°*^'  '^  ."orTthalristeS^i' 
wmie,  on   the  contrary,  as  again  not  seldom  occurs    whprp 

ZiTt^Zy  P^™'^''-"  -joyed  I.y  anXrlur  ! 
aiction,  the  situation  may  be  the  reverse.    Take  for  insflnol 
the  case  of  a  tax  on  co^jorations,  which  up  toi£  t^eTd 
argely  alimented  the  local  budget  and  which  now  is   raXed 
to    he  state,  thus  i-esulting  in  a  possible  deficit  h,    he  one  Ze 

thp  fll'"'''J  "•','"  '^^  °'^'''-    Take,  again,  the  developnient  of 
the  federal  inheritance  tax  in  thp  TTnit^  «+„+       "P'"i^"i'  or 

competition  is  being  strolgl^Telt  t  tLe  s^pa'rS^kS'^'^^^^ 

of  thT rel™''"'""  "'  '"^^  P""^^P'''  °^  -'^*i-  -1« 

HiffJf  •^'"'''*''"''  inferences  from  the  above  would,  of  couree 
differ  in  eveiy  nation.    We  shall  limit  ourselves   in  clol? 

rime  to  the  United  States.  As  the  most  contentious  nart  of 
the  subject  has  recently  become  the  relations  of  state  and 
federal  finance,  we  shall  begin  with  that 

thi:MS!  '"  '^^  ''''  ^'"^^  ^'^'^  -  '"^^  '"'-'°P-nt  of 
In  the  period  before  the  formation  of  our  present  constitn 

sM;s  tCTw  °'.  *'*'"*'°"  '''''''"'  -tirely'irthe  separate" 
fecfemtioJ  h.?"'*''  .«7^™";-t'  ™der  the  articles  of  con! 
leceration,    had   no   mdependent   powers   of   taxation      Th« 

SuT:  f.'om"the''sl?"  l^'  ''''  °'  '""^  federal  grrment^^J: 
secure  iiom  the  states  the  power  to  levy  import  duties  was 

m    large   measure   responsible   for   the   present   const  tuti^n 

Under  the  new  constitution,  the  states  abandoned  tothefed: 

eral  government  the  power  to  levy  import  duties  and    hv 

hih.V^  f  •       ,  ^""^  ^"'^^'^^  governments  were  also  pro- 

hibited from  levying  export  duties.  The  whole  remainT^ 
fieM  of  taxation  wa.  open  to  the  states  and  the  na  iT  w2 

exercise  by  the  federal  government  of  the  right  to  levy  either 
du-ect  or  indirect  taxes.  That  is,  it  was  required  that  nH? 
rect  taxes  should  be  uniform  and'that  direct'^  ho^l^be 
imposed  under  a  rule  of  apportionment  according  to  popula! 

When   the  new  government   went   into   effect,   the  states 


!    I 


672 


ESSAYS  IN  TAXATION 


aliiuentetl  themselves  from  direct  taxes  on  wealth — in  the 
fomi  of  either  the  general  property  tax  or  taxes  on  special 
classes  of  property  as  well  as  from  certain  taxes  on  business 
and  on  polls.  In  a  very  few  cases  there  were,  in  the  Southern 
states,  insignificant  taxes  in  the  shape  of  excises  and  taxes  on 
transactions.  Under  the  statesmanlike  guidance  of  Alexander 
Hamilton,  the  federal  government  decided  to  derive  its  rev- 
enue not  only  from  import  duties — which  were  designed  to 
constitute  the  leading  source  of  income — but  also  from  a 
combination  of  direct  and  indirect  taxes  lumped  together 
under  the  head  of  internal  revenue.  So  far  as  the  indirect 
taxes  were  concerned,  the  revenue  was  derived  abnost  exclu- 
sively from  sources  that  were  not  utiHzed  by  the  states;  but 
in  the  case  of  the  direct  tax  on  lands,  houses  and  slaves,  which 
was  levied  in  1798,  the  principle  was  initiated  of  competi- 
tion with  the  sources  of  state  revenue.  For,  to  the  extent 
that  the  direct  tax  was  levied  on  property  as  such,  it  was 
imposed  upon  the  same  objects  that  were  already  subject  to 
state  taxation.  This  is  true  also  of  the  minor  taxes  on  the 
sales  of  certain  commodities  and  on  legal  transactions,  in  so 
far  as  these  were  found  in  a  few  of  the  southern  states. 

It  is  interesting  to  speculate  what  would  have  been  the 
result  in  the  United  States  had  the  Federalist  policy  been  con- 
tinued. As  is  well  known,  however,  the  political  revolu- 
tion which  ushered  in  the  Republican  party  brought  with  it 
also  a  fiscal  revolution  which  settled  the  problem  for  over 
half  a  century.  The  new  policy  decided  upon  the  abolition  of 
all  internal  revenue  taxes  and  made  the  United  States  de- 
pendent upon  revenue  from  import  duties  alone.  In  this 
way  the  fiscal  spheres  of  state  and  nation  were,  kept  entirely 
separate. 

When  the  war  with  England  broke  out,  the  Republican 
party  was  compelled  to  revert  to  Hamilton's  policy  and  to 
resort  to  a  system  of  internal  revenue,  including  all  the  old 
taxes,  and,  in  addition,  excises  on  commodities.  Had  the 
war  continued  a  few  months  longer,  there  is  no  doubt  that  the 
sphere  of  direct  taxation  would  have  been  greatly  increased 
and  that  Congress  would  have  accepted  the  report  of  the  com- 
mittee which  had  recommended  the  imposition  by  the  federal 
government  of  an  income  tax,  an  inheritance  tax,  and  a  tax 
on  such  corporations  as  were  of  any  importance  at  the  time. 
But,  with  the  sudden  cessation  of  the  war,  not  only  did  it 


FEDERAL,  STATE  AND  LOCAL  REVENUES  673 
become  unnecessary  to  levy  these  additional  taxes  but  it  now 
L=  f:r:'  ^  '''''  ^  ^''-^-  «^e  entS  tyL^oT 

deSde1ri^4\rtTe  trr.S  ^  1^. 

1830  on  ,t  became  possible  to  reduce  the  rate  o  the  tarS 
duties  contmually.    With  the  outbreak  of  the  Civil  War  how 

orboth"Xr  "'^  -^---P^^-^^  and  a  comprehensil  system 
to  ,„nnK,  .r  and  mdu-ect  taxation  was  adopted  in  order 
to  supply  the  pressmg  needs  of  the  treasury.    This  system 

Sed  Imol  theT  rr  P°"'"«  "^^"^  ''  taxation  eo": 
pnsed  among  the  direct  taxes  a  tax  on  real  estate  a  eeneral 

"^187^  Z  "'.f  r?  r  r^  ^  ^^  -  eoJptktLT  "' 
ay  1872,  when  the  last  of  the  war  taxes  was  repealed    thp 

country  settled  down  to  a  new  system  of  revenue  rLpelce 
ba^is     Ever  smce  the  advent  of  Jefferson,  as  we  have  leaS 
the  federal  government  had  reUed,  in  peace  times  excS^v 
on  customs  duties     It  was  now  wisely'decideTto'suppteS 
the  proceeds  of  the  tariff  by  a  system  of  internal  revX 

consCpfion  X"  °"  " ''"'  •'"^™P'»^-t,  articles  TZe 
dXv  of  ^L  n  .  r«f  generation  this  remained  the  settled 
pohcy  of  the  United  States,  interrupted  only  by  the  tem- 

Tdt^^Zl  .1  ?  f  °°>Prehens,ve  system  of  indirect  taxes 
and  to  eertam  direct  taxes  as  on  inheritances  and  cornora- 
tions  which,  under  our  peculiar  system  of  constitutionr^. 
terpretation,  were  classed  legally  as  indirect  taxes 

inaugurS  inToJ^Q ''^  tk''*'  ""^'^  °^  '"^^  ^""'"^  States  was 
inaugurated  in  1909.    There  was  now  added  to  the  revenue 

from  customs  duties  and  internal  excises  a  tax  on  colorations 
legally  classified  as  an  excise  tax,  but  from  the  econoSk  stand 
pomt,  of  course,  a  direct  tax.  To  this  there  was  X^in  1913 
an  mcome  tax  and,  in  1916,  an  inheritance  tax.  Even  ^thout 
the  outbreak  of  the  Great  War  there  seemed  to  bteve^S 
pect  of  an  augmentation  of  these  taxes  in  the  near  future 

To  recapitulate,  the  fiscal  policy  of  the  United  States  in 
peace  times  may  be  divided  into  four  periods.  In  the  fii^ 
or  Federahst  period,  the  national  revenues  were  derived  from 

from  1801  to  the  Civil  War,  tax  revenues  were  hmited  excent 
during  the  War  of  1812,  to  those  from  customs  dutl*;  3- 


I 


674 


ESSAYS  IN  TAXATION 


sively;  in  the  succeeding  period,  for  a  generation  after  the 
Civil  War,  a  limited  number  of  lucrative  indirect  taxes  on 
commodities  were  added  to  the  tariff  duties;  and  finally,  in 
the  period  beginning  with  1909,  the  indirect  taxes  on  com- 
modities were  supplemented  by  direct  taxes. 

Thus  in  our  fiscal  system,  as  in  so  many  other  matters,  the 
country  was  now,  after  the  lapse  of  a  century,  reverting  to  the 
Hamiltonian  pohcy  of  government.  But  it  is  to  be  noted  that 
at  the  close  of  the  first  decade  of  the  present  century  there 
were  two  important  facts  which  distinguished  our  condition 
from  that  which  existed  at  the  close  of  the  18th  century.  The 
first  is  that  in  the  Hamiltonian  system  the  du-ect  taxes  were  a 
minor  factor  in  comparison  with  the  indirect  taxes;  whereas, 
now,  the  tendency  now  seemed  to  be  the  other  way  and  the  in- 
direct taxes — hoth  import  duties  and  internal  revenue — ^were 
being  subordinated  to  the  direct  taxes.  The  second  and  more 
important  point  is  that,  in  the  interval,  the  fiscal  situation 
of  the  states  had  entirely  changed,  so  that  the  problem  of 
the  relation  of  federal  and  state  finance,  which  scarcely  existed 
in  Hamilton's  time,  has  now  assumed  important  dimensions. 

In  the  beginning,  and  for  a  long  time,  the  fiscal  needs  of 
the  separate  states  were  insignificant.  The  expenses  were 
very  slight  and  the  revenues  were  derived  largely  from  fees 
and  other  miscellaneous  sources.  When  Secretary  Wolcott  made 
his  famous  report  on  state  taxes,  in  1796,  he  disclosed  the 
fact  that  of  the  total  annual  .expenditures  in  Massachusetts 
of  $145,531  only  $25,682  needed  to  be  derived  from  taxes; 
while  in  the  state  of  New  York  there  had  been  no  need  of 
taxation  at  all,  except  for  local  purposes,  for  a  numl)er  of 
years,  the  last  state  tax,  which  was  levied  only  very  rarely, 
having  been  imposed  ciglit  yeara  before  and  amounting  to 
an  insignificant  sum  designeil  to  last  for  several  years.  What 
Secretar>^  Wolcott  referretl  to  is  only  direct  taxes.  As  a  matter 
of  fact,  however,  as  we  learn  from  a  contemporary  document,* 
of  the  total  New  York  revenue  in  1796  of  $144,247  all  was 
derived  from  the  interest  on  investments  or  loans,  except 
$31,295,  which  sum  came  from  the  duty  on  "sales  at  vendue." 
In  Virginia  the  taxes  were  somewliat  more  regular,  l)ut  still 
very  insignificant.  It  may  be  stated,  therefore,  as  a  general 
proposition,  that  there  was  virtually  no  problem  of  state  taxa- 

»  Remarks  on  the  Revenue  of  the  State  of  New  York.  By  Philip  Schuyler, 
;>  Tiioniher  of  the  Senate  of  that  state.     Albany,  1796,  p.  6. 


FEDERAL,  STATE  AND  LOCAL  REVENUES        675 

S  2te  "nance  °'  "'"""  '^  '"'  considerations  Tffect- 

onli\!owlv*Ti"^  '°/^  ^;f  ^^'-  *he  situation  changed 
oiuy  Slowly,    in  some  of  the  older  commonwealths    the  ,.Z^ 

of  state  revenue  slowly  increased  and  were  Tn't  by  ll  prS 
dev.op.,.  towaV  trra  ^f  tTrilTthey^Ti^iclS 

S^^'fTaxaTioTtf  %r'  "•*  ''"'  --equentS  o   Sg£ 

ont  nl        ^  T  ^\°^'^  'y'**''"  gradually  broke  down     What 

tLnfh^        /"  ^""^  ^?*  ''"""^  the  last  quarter  o    the  Si 

teenth  century  was  slowly  dupUcated  in  the  other  mlv?T 

"Xn'down^^sThlTT'^  *"'^  '^f'  '^'^^'y  f-  this  reLon, 

peialtTasXe:  ItTf'l:^^^^^^^^^^ 

manner  of  inequalities  have  crept  in     Wtrth   '''^:.''"d  »» 

;"ectr  t^  ''"I  "^  ''''  P-PeiAaxSlLtattt;:  tZ 
recourse   to  special  corporation    taxes      ^f^nnr.rU.r    i      •     • 
as  earlv  as  fliA  'fto'o    +u       V      i        ,        ^^^^o^dly,    begnmmg 

^J^z  tiiaS^tisir  siritf  tJ 
nr,L^g:r=!d-f— -tifrp"^ 

mont,  was  made  to  replace  the'old  and  n'runworkattx" 
on  personal  property  either  by  special  taxes  on  cXfn  fon^^ 
of  personalty  or,  somewhat  later,  by  a  system  of  income  tax^s 

and%Xaffin:n:e  w^/"  '^^'l^'T  -P-tanee"oVsuTe 
whereasTn  mfi  thlT.  ^  '"ahzed  when  we  remember  that 
werTmimol!  fh!  f  '"^Txt  ^'■°™  ^'^"^^  t'^^ation  was 

onlv  «^  rw.  \  A,  Z?^*'""^  °^  ^«^  York  state  amounted  to 
U„L?^f!^'  ,*''"' '"  \^^^'  whereas  the  expenditures  of  the 
United  States,  exclusive  of  postal  service,  were  $1,088  170  000 


I 


I 


i 


m 


676 


ESSAYS  IN  TAXATION 


the  expenditures  of  New  York  were  over  77  millions.  In 
fact  the  state  expenditures  alone  were  now  one-half  those  of 
the  national  government.^ 

So  prodigious  are  the  continual  increases  in  state  expendi- 
ture that  the  problem  of  meeting  them  wisely  becomes  one 
of  growing  difficulty.  It  is  hopeless  to  think  of  solving  the 
problem  l)y  reducing  expenditure.  Much  waste  and  extrava- 
gance can  of  course  be  eliminated  by  more  improved  accounting 
methods  and,  more  especially,  by  the  adoption  of  a  modern 
budgetary  system.  But  the  prospect  of  steadily  mounting 
expenditures  led  to  a  decided  feeUng  in  not  a  few  common- 
wealths that  unless  the  nation  ceased  to  reach  out  into  what  was 
more  or  less  rightly  conceived  to  be  the  preserves  of  the  states, 
serious  embarrassment  would  arise,  until  the  states  would 
ultimately  find  it  aknost  impossible  to  keep  pace  with  their 

advancing  needs.  ,    .     .     i 

The  outbreak  of  the  Great  War  has,  however,  revolutionized 
the  situation.  So  stupendous  was  the  cost  that  for  an  in- 
definite future  the  national  expenditures,  bequeathed  by  the 
conflict,  will  greatly  exceed  all  the  state  and  local  outlays. 
Whereas  in  1913  (the  last  general  census  year)  state  and  local 
expenditures  were  about  twice  as  large  as  those  of  the  national 
government,  in  1919  the  national  expenditures  were  (and 
promise  to  continue  for  the  future)  far  larger  than  the  state  and 
local  expenditures  combined.^ 

The  problem  of  taxation  has  thus  become  primarily  a 
national  problem;  and,  as  a  consequence,  the  greater  part  of 
the  national  revenues  will,  in  conformity  with  democratic 

1  The  total  for  aU  the  states  in  1917  was  $517,503,220.    Cf.  Financial 
Statistics  of  States,  1917.     1918.— p.  67. 
*  The  figures  of  expenditures  are  as  follows: 

For  1913  the  total  was  $2,799,000,000  divided  into: 

Nation  $953,000,000  Municipalities  $1,108,000,000 

State       377,000,000  (over  2,500) 

County,  370,000,000 


For  1919: 
State 


$640,000,000 


Municipalities  $1,233,000,000 
(over  2,500) 


Adding  another  half  bilUon  for  the  probable  <^oui|ty/xpe^^*t^^«^^^ 
we  have  no  intercensal  statistics,  makes  a  total  of  about  $2,500,00U,Wl), 
as  over  against  more  than  five  billions,  of  national  expenditures.  Ihe 
estimates  for  1922  run  over  four  billions. 


FEDERAL,  STATE  AND  LOCAL  REVENUES        677 

instincts  have  to  be  derived  from  direct  taxes  The  old  timP 
md.rect  taxes,  even  though  necessarily  stretched  to  the  ve^ 

Sdei  Ts  "■■'""''/""  accordingly  henceforth  have  to T 
regarded  as  a  supplementary  resource.  The  conseouence  k 
that  while  the  national  government  will  no  douuTthe  fu 

Sect  t^x  s  r^^i  rr'r  ^'^v"^*"-^  '^^  -^  ^tht 

lijuirect  taxes,  it  will  have  to  lew  a  far  larp-or  «moi,r.+  ^f  j-  j. 
taxes  than  will  the  states  and  loc^lirie.  Thi™  Lt  ^T^ 
sirable  result  because  both  the  income  and  the  inheritit 
tox  rest  on  so  broad  a  base  as  to  make  their  ut  iLfon  by  he 
federal  government  desirable.  ^ 

anItSsv"Tir.f?'''7?'"V'^^^*/°'-  *'^^  ^'^P'^rate  states 
ana  localities  i"    The  states,  it  is  clear,  should  rely  chief! v  unon 

corporation  taxes,  upon  special  taxe;  on  property,  and  upon 
hcense  and  business  taxes.     Where  these  do  not  suffice  and^ 

ncreasmgly  successful  endeavor  is  made  to  aboUsh'the  i^ 
adequate  general  property  tax,  the  states  should  rely  in  add" 

ion,  upon  a  part  of  the  inheritance  tax  to  be  assessed  by  the 
federal   government   and   finally   upon   income  taxes    wh  ch 
should  be  supp  ementaiy,  and  as  far  as  possible  confonTble 
to  the  federal  income  tax.  ""'maoie, 

The  reason  why  a  distinction  is  made  in  the  suggested  assess- 
ment of  hese  two  taxes  is  that  the  problem  ^residence  k 
more  easily  solved  in  an  income  tax  than  it  is  in  an  kihentance 

a  decedent,  while  the  mcome  tax  may  be  so  arranged  as  to 

nclude  a  busmess  tax  as  well  as  a  tax  upon  the  in^viXal 

In  either  case,  however,  and  irrespective  of  the  juiSdS 

nodoubTtr  *'  ^'^'^*""'^'-  '''''  ^'"'^  American  Srtm 
andte  VheSancTr '  ^''"*'  ''''''''  "^"^^  ^"^'^  '"^^  ~« 
Finally,  local  governments  should  rely  primarily  upon  rev- 
enues referable  to  the  principle  of  benefits,  such  as  speckl  al- 
sessments  and  fees  of  all  kinds,  which  should  be  better  Sat^ 

^^  S  W"   -  --  ^u-l -S  Ta 

bplVl'  '!?'•  ""^l**''^  *''*.  *''<'  P''"'''*""  °f  fiscal  interrelations  will 
be  solved  m  this  general  direction  in  the  United  States;  for  The 
solution  IS  m  harmony  with  the  fundamental  princip  es  that 
have  been  presented  above.    In  other  countries'^  the  practica 


I 


!l 


I 


678 


ESSAYS  IN  TAXATION 


aspect  of  the  solution  will  no  doubt  be  different;  but  it  is  safe 
to  say  that  throughout  the  world  the  trend  of  adjustment  in 
the  fiscal  relations  of  federal,  state  and  local  governments  will 
be  found  to  be  in  line  with  the  solution  that  has  been  sketched 
above. 


tih' 


CHAPTER  XXII 

THE  WAB  REVENUE  ACTS 

The  war  revenue  act  of  Ontohpr  t   ioit 
tinction  of  being  the  most  riTnti!  fi  '   .  "^^  Possesses  the  dis- 
Never  before  h^  an  endLT.?      "'^'  enactment  in  history, 
measure  for  so^olori  !Tv      '"  ""^^  *°  ^''^^'^^  '"  ^  ^^Sh 
by  this  law     In  thp  in    ^^""''  "^  ''  '""^'^t  *°  ^e  obtained 

a'short  hiirici"  intJir^^J;ra^stl^or^  ^"- 

the  novel  and  SSant  nnnf  -w'-  ^"'^  ^"  interpretation  of 
to  public  finance  •'""^nbutions  made  by  the  measure 

I.  Historical  Retrospect 

The  history  of  our  war  finance  begins  with  fJ,» 
revenue  law  enacted  shortly  after  thn,.r!„i.    1  ^^^'^^^^y- 
and  two  and  one-half  vp^ri  k  T  outbreak  of  the  conflict 

This  histo^  howevrLw'b  ''"^^"t^^"^^  into  the  war. 
member  the  cLnTLthe  Zot  nf  Tt"^?  """^  ""'«^«  ^«  '^ 
occurred  in  the  orecedll  fi.      ^       ^^""^^  '"''^''""e  that  had 
of  the  last  centu^wtn^thpLf  r  /'i"™  ^^^  "^'^^  ^^^enties   /i  '' 
fiscal  upheaval  o'^;2re]tr^^^^^  J-  j^^er  the 

had  been  derived  fmm  n.Lr.^        \  -     '  ^^^  federal  mcome 

the  second  great  war  revenue -.ct  wh.VK  ■.  ■■       *""  changes  made  by 

1918,  although  if  did  ZZ^yr^^^.^Z"^''  T^T  "^  '^  ">«  A<='  olf 
Feb.  24,  1919.  A  separate  fr™wTIf  .k?  *^''°'  "^  *■>«  P^-esident  until 
mental  ehanges  in  pXcTp,'  w  "und  ■„%' VJ^"?'  "'«'''  "»  '"""a- 

679 


J 


''SffSir>*tf!iSI*i;,'* !Biiitw»iiiiiiiiiM^^^^^^ 


680 


ESSAYS  IN  TAXATION 


I 


'h 


within  the  constitutional  inhibition.  After  the  passage  of  the 
Sixteenth  Amendment,  however,  the  corporation  tax  was  merged 
in  1913  into  the  general  income  tax,  which  now  marked  the 
definitive  adoption  of  direct  taxation  as  a  regular  part  of  the 
national  revenue.  Recent  events  have  only  served  to  confirm 
the  wisdom  of  those  who  argued  that,  from  the  point  of  view  of 
possible  warfare  alone,  it  would  be  the  height  of  folly  to  deprive 
the  government  of  a  great  nation  of  such  a  potent  engine. 
Without  the  Sixteenth  Amendment  we  should  have  been  de- 
prived not  only  of  the  present  income  tax  but,  in  all  probabil- 
ity, of  the  present  excess-profits  tax  as  well. 

The  Act  of  October  22,  1914,  entitled  "An  act  to  increase  the 
internal  revenue  and  for  other  purposes,"  was  popularly  known 
as  the  emergency-revenue  law  and  was  so  tenned  in  various 
official  documents.  The  financial  disorders  which  followed  the 
outbreak  of  the  war  so  seriously  aff(K.'ted  current  revenues  that 
an  addition  was  imperatively  needed.  This  was  provided  by 
four  series  of  taxes:  first,  the  increase  of  the  tax  on  beer  from 
$1  to  $1.50  a  gallon,  together  with  slightly  higher  taxes  on  cer- 
tain wines;  second,  the  so-called  special  taxes  on  tobacco  dealers 
and  manufacturers,  on  bankers,  brokers,  commission  merchants, 
and  proprietoi-s  of  public  amusements;  third,  schedule  A,  com- 
prising a  variety  of  stamp  taxes  on  transactions,  as  well  as  a  tax 
on  telegraph  and  telephone  messages,  express  and  freight  rates, 
and  Pullman  fares;  and  finally,  schedule  B,  consisting  of  stamp 
taxes  on  toilet  articles  and  chewing  gum.^ 

The  additional  revenue  thus  secured  was  about  $52,000,000. 
That  it  was  needed  is  obvious  from  the  fact  that  the  ordinary 
internal  revenue,  as  appears  from  the  table  on  the  next  page,  fell 
from  308  millions  in  1914  to  some  283  millions  in  1915.  More- 
over, owing  to  the  increased  yield  of  the  income  tax,  as  a  result 
of  the  business  recover}-,  the  total  internal  revenue  for  1915  was 
over  410  millions  as  compared  with  380  millions  in  1914. 

The  operation  of  the  law  was  limited  to  the  period  ending 
December  31,  1915.  It  was  so  apparent,  however,  that  the 
emergency  was  growing  more  serious,  that  Congress  by  joint 
resolution  of  December  17,  1915,  extended  the  operation  of  the 
law  to  the  close  of  1916.  The  prosperity  of  the  country  con- 
sequent upon  the  filling  of  the  Allies'  orders  for  munitions  and 
food  resulted  in  an  addition  of  almost  a  hundred  millions  to  the 
internal  revenue  during   1916,   the  emergency  revenue  now 

» For  details  cf.  Tables  I,  III  and  IV,  infra,  pp.  708-712 


THE  WAR  REVENUE  ACTS  681 

yielding  over  84  millions  and  the  income  tax  providing  abnost 
125  as  against  the  80  millions  of  the  preceding  yean  """^ 

sumnL^nf  }mrl'^^''^"^'u^  ^^^"""^  ^"^"^^  ^^e  spring  and 

iiscussion,  of  the  law  of  September  8,  1916.    This  act  entitled 
like  Its  predecessor,  ^' An  act  to  increase  the  revenue  and  S 
other  purposes  "  repealed  all  the  taxes  imposed  by  the  emer 
gency-revenue  law  except  the  so-called  special  taxes  which  were 
to  contmue  until  the  end  of  the  year.    The  chief  feature  of  the 
new  law  was  the  increase  of  the  income  tax,  the  normal  rate 

made  sWr'^  '^'l  "^^'  ^"'  *'^  '^^'^  ^^  P-gression  betg 
made  sharper.-    Next  m  importance  were  the  changes  in  the 

taxes  on  tobacco  and  liquors,  the  rates  on  tobacco  and  beer 

94'  wht  fr'  f'  ""^  ''■  ^"  *'^  ---g-cy-revenue  law  o 

creatr7    Tw.     '^*f  """^  '^^'^^"^"^  "^"^^  ^''^  somewhat  in- 
creased.   Two  new  taxes  were  added,  the  estate  tax,  graduated 

^  Internal  Revenue  and  Customs  Receipts  (in  Millions  of  Dollars) 

^Pfts $159  1 

1  obacco 79  8 

Fermented  Liquors 57  1 

Oleomargarine 13 

Miscellaneous n 

Special  Taxes 

Schedule  A 

Schedule  B 

Estate ^ 

Munitions ]  ^ 

Excess  Profits *  * 

Miscellaneous.... 


1915 

1916 

144.6 

158.7 

79.9 

88. 

79.3 

88.8 

1.7 

1.5 

1.5 

1.7 

4.9 

6.9 

20.5 

38.1 

2.9 

4.1 

1.1 


1.5 


1.7 


Total  of  above  items 308  6 

2'dinary 308.2 

Emergency 

Income 71  4 

Corporation 43  1 

Individual 28.3 

Total  Internal  Revenue 380. 

Customs  Duties 292  3 


Total  Tax  Revenue 672. 3 

Total  Ordinary  Receipts 743 . 7 

Total  Receipts  (including  Postal 
Revenue) i^002.6 

2  See  Appendix,  Table  V,  infra,  p.  713 


335.5 
283.4 

52. 

80.2 

39.1 

41. 
415.7 
209.8 

625.5 
697.9 


387.8 

303.5 

84.4 

124.9 

56.9 

67.9 

512.7 

213.1 

725.8 
779.7 


1917 

192.1 

103.2 

91.9 

1.9 

2. 

15.7 

8.3 

.7 

6. 

27.7 

.037 
2.1 

449.7 
354.4 
95.3 
359.7 
179.6 
180.1 
809.4 
225.9 


1,035.3 
1,118.2 


985.2        1,091.7       1,447.9 


11, 


682 


ESSAYS  IN  TAXATION 


from  1  per  cent  to  10  per  cent,  and  the  munitions  manufacturers' 
tax,  the  duration  of  which  was  limited  to  one  year  after  the 
close  of  the  war.  This  was  a  so-called  excise  tax,  over  and 
above  the  income  tax,  of  12^  per  cent  upon  the  net  profits  of 
manufacturers  of  gunpowder,  cartridges,  projectiles,  firearms 
and  motorboats,  including  submarines.  Finally  came  a  series 
of  so-called  special  taxes,  limited,  with  one  exception,  to  manu- 
facturere  of  tobacco,  brokers,  and  proprietors  of  public  amuse- 
ments. The  exception  consisted  in  an  excise  tax  on  corpora- 
tions, joint  stock  and  insurance  companies,  amounting  to  50 
cents  for  each  $1,000  of  the  value  of  the  capital  stock  over 
S99,000.  The  act  also  provided  for  changes  in  the  import  duties 
on  dyestufifs  and  printing  paper,  and  brought  into  existence 
the  new  tariff  commission. 

The  Act  of  1916  was  expected  to  yield  an  additional  revenue 
of  several  hundred  millions.  During  the  early  months  of  1917, 
however,  the  political  situation  became  so  acute  that  Congress 
decided  to  make  provision  for  the  imminent  conflict  by  creating 
the  so-called  special-preparedness  fund,  to  be  used  only  for 
military  and  naval  preparations.  This  was  accomplished  by  the 
Act  of  March  3,  1917,  entitled,  "An  act  to  provide  increased 
revenue  to  defray  the  expenses  of  the  increased  appropriations 
for  the  army  and  navy  and  the  extensions  of  fortifications  and 
for  other  purposes."  The  fund  was  to  be  alimented  from  two 
sources:  the  excess-profits  tax  and  a  considerable  addition  to 
the  inheritance  tax.  The  excess-profits  tax  consisted  of  8  per 
cent  of  the  amount  by  which  the  net  income  of  every  corpora- 
tion and  partnership  exceeded  the  sum  of  (a)  $5,000  and  (b) 
8  per  cent  of  the  actual  capital  invested.  The  law  did  not 
apply  to  corporations  exempted  from  the  income  tax  or  to  part- 
nerships carrying  on  similar  businesses  or  deriving  an  income 
from  agriculture  or  personal  service.  The  estate  tax  was  so 
altered  that  the  new  rates  were  graduated  from  IJ^  per  cent 
to  15  per  cent.^ 

The  two  acts  resulted  in  a  substantial  increase  of  the  revenue 
in  1917.  Only  an  insignificant  amount,  however,  waa  obtained 
from  the  excess-profits  tax  ^  and  only  about  six  millions  from 
the  estate  tax.  But  the  munitions  manufacturers'  tax  yielded 
about  28  millions,  and  the  ordinary  internal  revenue  about  60 
millions  additional,  while  the  income  tax  rose  from  125  to  360 
milHons,  so  that  the  total  internal  revenue  for  1917  was  over 
*  See  table,  infra,  p.  714.  « See  table  on  preceding  page. 


THE  WAR  REVENUE  ACTS  683 

T  !S  w"!  ""  •  u  "^^^^  '^'f^^'  somewhat  more  than  double 
the  pre-war  yield  under  ordmary  business  conditions 
immediately  after  the  declaration  of  war  in  April,  1917  oreo- 

SmLrV^f '^'  h"'   ^'""'^  ""^^"^^    appropriations 
were  made.    That  a  prodigious  mcrease  in  the  revenue  would  be 

needed  was  apparent,  but  exactly  how  much  would  be  neces- 
sary, no  one  knew.  The  Treasury  Department  refrained  from 
If  ^J^.rr.u''^'*  estimates  and  when  the  present  writer 
stated  that  the  expenditures  would  amount  to  at  least  ten  bil- 
lions, his  assertions  were  greeted  with  a  smile  of  incredulitv  It 
soon  appeared,  however,  that  this  calculation  was  well  within 
the  truth,  and  preparations  were  made  by  Congress  to  finance 
the  war  on  that  assumption.  After  the  revenue  bill  had  come 
to  the  Senate  Committee  on  Finance,  a  revised  list  of  probable 
appropriations  for  1918  was  submitted,  bringing  the  total  to 
mneteen  or  twenty  billions.    This  unexpected  chfnge  called  for 

cVsZn  fn  tr''%"^  ^^  '^'  ^"^'  ^"^  ^^^'  ^^'''  ^  Pr^t^-^t^d  dis- 
orOctober  3'  ig"^''"^'"  committee,  to  the  passage  of  the  Act 

II.  Summary  of  the  War  Revenue  Acts 

inJ^V^""  ''  ^""^^If  Ai^.^'*  ^^  defray  war  expenses  and 
for  other  purposes."  All  the  new  taxes  are  to  be  superim- 
posed upon  the  existing  system,  except  that  the  old  excess- 
profits  tax  is  repealed  and  the  munitions  manufacturers'  tax  is 
lowered  to  ten  per  cent,  and  is  to  cease  entirely  after  January  1, 

The  backbone  of  the  law,  arranged  in  thirteen  ^  titles,  consists 
ot  the  new  income  and  excess-profits  taxes,  each  of  which  will 
be  discussed  separately  later  on.  The  remainder  of  the  law 
f«  TOlfrn  4  fu«''^^  variety  of  imposts.^  The  most  important 
18  litle  III,  the  war  tax  on  beverages,  which  includes  an  addi- 
tional tax  of  $1.10  per  gallon  on  distilled  spirits  produced,  im- 

'  How  to  Finance  the  War,  Columbia  War  Papers,  no.  7,  p.  6 

« Changed  in  the  law  of  1918  to  fourteen 

» In  the  Appendix,  pp.  708-714,  are  printed  a  series  of  tables  not  to  be 
found  in  any  of  the  official  publications,  showing  the  detaik  of  the  old 
rat(.,,  the  changes  due  to  the  various  war  acts,  and  the  eSe  rates 

In  the  law  of  1918  this  became  Title  VI.  The  taxes  rdSTpirits 
tnv  wriTT'P^'"'  r^  ^"'  ^^™^"^^  "^»«^  ^^r«  doubl^  and  a  new 
i^creasSl  producer's  taxes  on  soft  drinks  were  greatly 


l| 


684 


ESSAYS  IN  TAXATION 


I 


III 


ported  or  in  bond,  and  of  $2.10  if  withdrawn  for  beverage  pur- 
poses. As  the  further  production  of  such  spirits  was  stopped 
by  the  Food  Administration  Act  of  August  10,  which  prohib- 
ited during  the  war  the  use  of  grain  for  distillation,  the  result 
is  that  all  existing  stocks  are  subject  to  the  high  tax  of  $3.20  a 
gallon.  The  law  imposes  a  further  tax  of  15  cents  a  gallon  on 
rectified  spirits,  while  the  rates  on  wines  and  cordials  are 
doubled,  and  on  grape  brandy,  trebled.  More  moderate  taxes 
are  imposed  on  soft  drinks  and  mineral  waters  as  well  as  on  the 
syrups,  extracts  and  gas  used  in  their  manufacture. 

Title  IV,  1  dealing  with  tobacco,  imposes  an  additional  tax 
varying  per  thousand,  on  cigars  from  25  cents  to  $7  and  on  cig- 
arettes from  80  cents  to  $1.20,  and  fixed  on  tobacco  and  snuff 
at  5  cents  a  pound.  In  the  case  of  more  than  100  pounds  of 
tobacco  or  1,000  cigars  or  cigarettes,  subject  to  the  old  tax  but 
removed  for  sale  before  the  thirty  days  when  the  new  law  goes 
into  effect,  the  additional  tax — known  as  the  excess-quantity 
tax — is  to  be  at  half  rates.  A  new  tax,  varying  from  3^  cent 
to  2  cents  per  package  or  tube,  is  imposed  on  cigarette  paper. 

Title  V,-  "  the  war  tax  on  facilities  furnished  by  public  util- 
ities and  insurance,"  assesses  freight  rates  3  per  cent;  express 
1  cent  for  each  20  cents  of  charge;  passenger  fares,  8  per  cent; 
Pullman  tickets,  10  per  cent;  pipe-line  transmission,  5  per  cent; 
telegraph,  telephone,  and  radio  messages  (of  15  cents  or  more) 
5  cents;  marine,  inland,  fire  and  casualty  insurance,  1  per  cent  on 
the  premium;  and  life  insurance  8/10  of  1  per  cent  on  the  amount 
of  the  policy.  In  the  case  of  insurance  the  tax  is  to  be  paid  by 
the  issuer  of  the  policy,  in  all  other  cases  it  is  provided  that  the 
tax  shall  be  paid  by  the  person  paying  for  the  service. 

Title  VI,^  the  "war  excise  taxes,"  charges  automobiles,  mu- 

1  In  the  law  of  1918  this  became  Title  VII.  The  taxes  on  tobacco  were 
increased  on  the  average  about  fifty  per  cent,  with  the  exception  of  the 
tax  on  cigarette  paper. 

2  In  the  law  of  1918  the  name  of  this  title  became  a  Tax  on  Transporta- 
tion and  other  Facilities  and  on  Insurance."  The  rates  on  Pullman  tickets 
were  reduced  and  on  pipe-line  transmission  increased,  to  8%.  Telegraph 
and  telephone  messages  were  taxed  5  and  10c.  according  as  the  cost  was 
under  or  over  50c.    Leased  wires  now  also  paid  10%  of  their  rental. 

*  In  the  law  of  1918  this  became  Title  IX  as  "Excise  Taxes,"  and  in- 
cluded many  new  taxes.  Twenty  classes  of  commodities  were  now  sub- 
jected to  a  retail  tax  of  10%  on  the  amount  in  excess  of  a  certain  price,  thus 
becoming  virtually  luxury  taxes.  The  tax  on  automobiles,  musical  in- 
struments, jewelry  was  increased  to  5%  and  on  perfumes,  cosmetics, 
etc.,  to  4%,  while  the  tax  on  moving-picture  films  was  changed  to  a  5% 


THE  WAR  REVENUE  ACTS  685 

sical  instruments,  jewelry,  sporting  goods  and  games,  chewing 
gum  and  cameras,  3  per  cent;  cosmetics,  toilet  articles  and  pat- 
ent medicmes,  2  per  cent;  moving-picture  films,  M  to  V^  of  1 
Z\nnf     T    ;.^"'^  ^otorboats  and  yachts  from  50  cents  to  $2 

user  Tn  .1  "th^'  T  ""^  '^"  ^^''  ^'T'  '^'  *^^  ^^  '"^^^'^'^  "P«^  the 
user,  m  all  the  other  cases  upon  the  manufacturer,  producer  or 

'Tt  1   vif i^'^r^"  ^'  ^^^"  ^^  *^^  ^^^  ^^^i«^«  «r ''  «P^«ial  taxes." 
litle  Vll,  IS  the  war  tax  on  admissions  and  dues.    On  admis- 
sions where  the  charge  is  over  5  cents  (or  in  the  case  of  out- 

oZ^Trwl^  ''"*'i  '^'  'f  ^^  ^  ^^"^  ^^'  ^^^^  10  cents  of 
charge.    Children  under  twelve  pay  only  1  cent  and  the  tax  is 

remitted  m  the  case  of  religious,  educational,  or  charitable  in- 
stitutions or  agricultural  fairs  not  conducted  for  profit  On 
dues  or  membership  fees  over  $12  of  social,  athletic,  or  sport- 
ing clubs,  the  tax  is  10  per  cent. 

Title  VIII,2  "the  war  stamp  taxes,"  includes  a  variety  of  im- 
posts on  bonds,  conveyances,  entries,  proxies,  and  powers  of 
attorney;  on  the  issue  and  transfer  of  capital  stock;  on  trans- 
actions on  stock  and  produce  exchanges;  on  promissory  notes 
and  time  drafts;  on  playing  cards,  passenger  tickets  over  $10 
and  parcel-post  packages. 

Title  IX  3  imposes  an  additional  "war  estate  tax"  varying 
from  H  of  1  to  10  per  cent.  This  resulted  in  the  inheritance 
tax  being  gr;aduated  up  to  25  per  cent  on  sums  over  ten  milHon. 

other  first-class  mail  with  the  exception  of  drop  letters  in 
which  no  change  is  made.  In  the  case  of  second-class  mail  a 
distinction  IS  mtroduced  between  the  space  devoted  to  reading 
matter  and  to  advertisements.  In  the  foi-mer  the  existing  rate 
rentals  tax.   Sixteen  new  classes  of  commodities  were  now  subject  to  a 

grne'rX  5r   t^^^^^^^  1  ^'^  ^'^^^^^^^^  ^-'  thrrXbdng 

generally  5%  to  10%   (w,th  the  smgle  exception  of   100%  on   daggers 

MesTuTLJ''"/''f^  ^  ^--   were  those  of :" 

tides  of  fur  and  candy.  Finally  the  tax  on  the  use  of  motorboats  and 
J^chts  was  mcrea^cKi  to  a  maximum  of  $10  and  wa^  removed  from  tht 
title  to  the  new  Title  X  mentioned  below 

an  the  law  of  1918  this  became  Title  VIII.     The  only  changes  were  a 

inJr^Lfof  'Z  tlrpll^g-^:  t^t  .f  ^at  ^'^  ^^^^  ^^^  ^^^ 
'  In  the  law  of  1918  this  became  title  IV.     The  only  changes  were  a 

more  regular  progression  in  the  lower  classes. 

*  In  the  law  of  1918  the  additional  postal  charges  were  dropped. 


'II 


I 


n 


I    i 


ll 


686  ESSAYS  IN  TAXATION 

of  1  cent  a  pound  is  increased  to  1}4  cents  from  July  1,  1918, 
and  to  134  cents  after  July  1,  1919.  In  the  case  of  the'latteri 
the  rates  up  to  July  1,  1919,  vary  from  1}^  cents  in  the  first  and 
second  zones  to  S}4  cents  in  the  eighth  zone;  in  the  succeeding 
year  they  are  to  run  from  l^itobUt  cents  respectively;  in  the 
following  year  from  \%  to  1%  cents,  and  after  July  1, 1921,  from 
2  to  10  cents.  ^ 

III.  The  Tax  Burden  and  its  Distribution 
In  considering  this  code  of  taxes— for  it  is  nothing  less  than 
a  code— the  first  questions  that  present  themselves  relate  to 
the  expected  yield  of  the  system,  the  relative  proportion  be- 
tween loans  and  taxes,  and  the  distribution  of  the  liurden. 
According  to  oflftcial  estimates  the  probable  yield  -  of  the 

1  The  act  of  1918  contains  an  additional  Title  X  called  Special  Taxes 
which  changed  the  special  excise  tax  on  corporations  asoripinnlly  levied  in 
191G  to  one  per  mill  on  cajiital  stock  with  a  deduction  of  15,000  "for  domes- 
tie  corporations.  The  special  taxes  on  manufacturers  of  cigars,  cigarettes 
and  tobacco  were  greatly  increased  and  twelve  new  ckisses  of  special  taxes 
were  imposed  on  various  kinds  of  brokers,  and  of  public  exhibitions  or  shows, 
bowling  alleys,  billianl  rooms,  shooting  galleries  and  riding  academies,  on 
operating  automobiles  for  hire  and  on  breweries,  distilleries,  and  retail  and 
wholesale  liquor  dealers  or  dealers  in  malt  liquor.  The  tax  on  motor 
boats  antl  yachts,  now  increased  to  a  maximum  of  $10,  was  removed  from 
the  old  VI  (new  Title  IX)  "Excise  Taxes"  to  this  Title  X  (special  Taxes). 

2  The  estimates  made  by  the  conference  committee  are  as  follows: 

Incomes $851,000,000 

Excess-Profits 1,000,0(K),000 

DistiUed  Spirits 140,000,000 

Fermented  Liquors 46,000,000 

Wines  and  Cordials 7  qoO  000 

Soft  Drinks  and  Syrups 13',OOo[oOO 

Tobacco 63,400,000 

Transportation 157,300,000 

Telegraph,  Telephone  and  Radio  Messages 7,000,000 

Insurance 5,'oOoioOO 

Gross  Sales 58,650,000 

Admissions  and  Dues 51  500  000 

Stamps 29*000,000 

Estates 5,000,000 

Virgin  Islands  Goods 20  000 

First  Class  Mail 70,000,'oOO 

Second  Class  Mail 6,000,000 

Total $2,509,870,000 

When  the  Secretary  of  the  Treasury  rendered  his  annual  Report  in  Dec, 
1917,  he  increased  the  estimates  of  the  Excess-Property  Tax  to  $1,226 
millions  and  of  the  Estate  Tax  to  70  milhons. 


THE  WAR  REVENUE  ACTS  687 

b  Ihons.    These  figures,  however,  present  no  adequate  pictum 
of  the  actual  tax  burden  imposed  by  the  war.    To  do  E    t 
would  be  necessary  to  add  the  proceeds  of  existing  taxe     so 
far  as  they  exceed  the  normal  pre-war  figures.    We  have  seen 
that  the  internal  revenue  receipts  for  19f7  were  overso^  T 
lions.    It  seemed  not  at  all  unlikely  that  the  revenue  from  the 
same  sources  for  1918  would  be  around  a  billion      I    to  this 
we  add  approximately  the  quarter  of  a  billion  derived  from 
customs,  we  sWd  have  a  probable  tax  reventie  of  abou 
SH  billions.^    Deducting  the  600-650  millions  which  rente  ent 
he  average  annual  yield  of  the  customs  and  interna   revenue 
for  the  half  dozen  years  before  the  outbreak  of  the  Eiirop^^^^^ 

b^ei:  f  r  a^^biuLr  ''''''''''  ^^-  -™  '-  '^^^ 

The  next  question  is  whether  the  war  revenue  act  endeavors 

temnn„  ;  '""''r'"  ^°  ""'*'  "^^  *^^*'°"-    ^e  shall  notT 

Sntth '''"''  ^^'"^  !u'  P™"''"^  °^  '°^"«  "''■^^  taxes  or  to 
present  the  economic  theory  of  public  credit.^     Suffice  it  to 

eTreme  Th'  T^.'  '^  ™-t-factory  when  push^'to  an 
extieme.  The  chief  disadvantage  of  loans  is  that,  if  thev  are 
not  based  on  a  solid  foundation  of  taxes,  they  lead  to  a  pr^ 
gressive  deterioration  of  pubUc  credit  and  thus  in  par"  defeTt 
their  own  objects;  while  the  chief  disadvantage  of TxcesSe 
taxation  is  the  tendency  to  disrupt  or  to  repress  enterprise  lo 
such  an  extent   that  the  industrial  foundations  "the  war 

however     is    the    shght    difference,    measured    in    percent^ 
ag^,^  between  an  undue  and  a  proper  utilization  of'  pubHc 

The  great  conflicts  of  the  nineteenth  century  have  been  con- 
ducted almost  exclusively  on  the  theoiy  of  lofns.  The  figures 
ordmarily  found  are  fallacious  because  they  fail  to  distinS 
between  total  and  war  expenditures  on  the  one  hand  and  total 
and  war  taxation  on  the  other.  If,  as  is  the  only  proper  method 
we  attempt  to  ascertain  what  proportion  of  strictly  war  expenses 
are  defrayed  out  of  war  taxes  and  what  proportion  out  of  war 
bans,  we  shall  find  that  the  r61e  played  by  war  tax"  s  is  vl^ 
much  less  than  has  usuaUy  been  estimated!    In  the  histoi^^f 

«3CT2  847'"f?i)"7f/r,'  f "  "1""'  'T"""'  f"  1918  turned  out  to  be 
*d,672,847,000.    For  details  see  Appendix,  Table  VII.,  infra,  p  714 
"  Cf.  chap,  xxiu,  infra,  pp.  722  et  aeq.  '    '  ^' 


I  I 


it 


688 


ESSAYS  IN  TAXATION 


the  Civil  War,  for  instance,  it  will  be  seen  from  the  table  *  ap- 
pended that,  if  we  compare  total  taxes  with  loans,  the  proportion 
raised  by  taxes  in  the  first  full  year  of  the  war  was  under  9  per 
cent,  and  that  it  rose  in  the  next  year  to  only  12  per  cent,  and 
in  the  two  succeeding  years  to  only  16  per  cent.  If,  however, 
war  taxes  are  compared  with  war  expenditures,  as  is  proper, 
the  showing  is  far  worse.  If  we  estimate  the  ordinary  tax  reve- 
nues and  expenditures  at  about  fifty  millions  (in  1860  they  were 
each  about  fifty-three  millions)  it  appears  from  the  table  ^  below 
that  the  proportion  of  war  taxes  to  war  expenditures  was,  in  the 
first  full  year  of  the  war,  only  one-fifth  of  1  per  cent  and  that 
even  in  the  second  year  it  reached  only  8J^  per  cent.  In  other 
words,  the  first  half  of  the  war  was  conducted  almost  exclu- 
sively on  the  loan  policy.  The  disastrous  results  are  only  too 
well  known. 

If  we  compare  the  fiscal  program  of  Great  Britain  in  the 
present  war  with  that  of  the  other  belligerents,  we  shall  find 
that  the  difference  is  much  less  than  is  commonly  supposed. 
As  a  matter  of  fact,^  the  war  taxes  in  the  first  year  of  the 
war  (which  represented  six  months  of  the  fiscal  year)  amounted 
to  a  little  over  7  per  cent  of  the  war  expenditures.  In  the 
second  year  of  the  war  the  proportion  rose  to  over  9  per  cent 

*  Taxes  and  Loans  in  the  Civil  War  (in  Millions  of  Dollars) 
CusUyms  Internal  Direct  Total  lax    Loans   Total  loans       Per  cent 


revenue 

tax 

revenues 

ami  taxes 

obtained 
taxes 

1862 

49.1 

1.8 

50.9 

529.7 

571.6 

8.9 

1863 

69.1 

37.6 

1.5 

108.2 

775.2 

883.4 

12.2 

1864 

102.3 

109.7 

.5 

212.5 

1088.2 

1300.7 

16.3 

1865 

84.9 

209.5 

1.2 

295.6 

1474.5 

1770.1 

16.1 

These  figures  differ  from  those  of  H.  C.  Adams,  Public  Debts,  p.  132, 
which  have  been  repeated  by  Bastable,  Public  Finance^  p.  653,  and  since 
then  by  many  others.  The  first  three  and  the  fifth  columns  of  the  above 
table  are  taken  from  the  annual  reports  of  the  secretary  of  the  treasury; 
the  other  columns  are  obtained  by  simple  computation. 

*  Expenditure  and  Taxes  in  the  Civil  War  (in  Millions  of  Dollars) 


Total 

War 

Total 

War 

Percentage  of  war  taxes 

expenditures 

expenditures 

taxes 

tcuces 

to  vmr  expenditures 

1862.. 

477.8 

427.8 

50.9 

1. 

.02 

1863.. 

729.9 

679.9 

108.2 

58.2 

8.5 

1864.. 

877.4 

827.4 

212.5 

162.6 

19.6 

1865.. 

.     1309. 

1259.1 

295.6 

145.6 

11.5 

'  C}.  the  detailed  tables,  infra,  p.  760. 


THK  WAR  REVENUE  ACTS  689 

Ttjtul  o/'^  ^T  *°  ^l^  P^--  «*>"*•    The  real  contrast  with 

PrL;  R  ^       *"'  ""."""^  ^^^  ^•''"  W'^''  ^««ides  in  the  fact  that 
Oreat  Britain  was,  dunng  the  first  three  years  of  war,  just  about 
one  year  ahead  of  the  United  States.    That  one  year's  £rence 
however,  m  the  furnishing  of  an  ample  tax  revenue  quite  sufficed 
nXr  Tt      "^^  ^"*'''°  ^""^  ^^"^  •■''^"•t^  «f  the  American  fiscal 

rt.!f  p   .     '^""fu'  u™^  '^''^"  '"  ^^^  P'^^"^  war  we  compare 
Great  Bntam  with  the  other  belligerents,  which,  even  in  the 

1^,  °i  ^f  f°  and  Germany,  have  done  no  better  than  did  the 
United  States  dunng  the  first  two  years  of  the  Civil  War 
me  significant  fact  for  our  purposes  is  that  in  the  third  year  of 
war,  after  the  imposition  of  heavy  tax  burdens,  Great  Britain 
was  raismg  only  a  little  over  one-sixth  of  the  war  expenditures 
by  war  taxation,  while  the  other  belligerents  have  been  doing 
still  less.  Although  the  proportion  during  the  fourth  year  will 
probably  be  slightly  higher,'  the  British  government  has 
steadfastly  refused  to  make  any  substantial  change  in  the 
policy  which  results  in  securing  by  far  the  greater  part  of  war 
expenditures  from  war  loans. 

In  the  United  States,  where,  at  the  time  of  writing,  the  first 
fiscal  war  year  is  only  half  completed,  it  is  impossible  to  present 
raore  than  rough  calculations.    If  the  Secretary  of  the  Treasury 
shou  d  be  correct  in  his  estimate  that  the  total  expenditur^ 
will  be  about  nineteen  and  a  half  billions,^  the  proportion  of 
war  taxes  to  war  expenditures  would  be  about  one-sixth    a 
figure  which  compares  favorably  both  with  Great  Britain  and 
with  our  own  Civil  War  experiences.     It  is,  however,  ludi- 
crously less  than  the  amount  proposed  by  some  of  the  en- 
thusiasts both  m  Congress  and  in  the  academic  world    who 
spoke  about  raising  the  entire  outlay  by  taxation.    It  is  also 
'  As  a  matter  of  fact,  it  was  18%.    C/.  infra,  p.  760. 
Ihe  exact  estimates  are  nowhere  to  be  found  in  the  annual  report  of 
the  secretary  of  the  treasury  for  1917.    By  combining  various  figu^  W 
ever,  we  get  the  following  result:  <»™us  ngures,  now- 
Ordinary  expenditures  (p.  56) 12  •?]«  9Q«;  99^ 

Postal  expenditures  (p.  73) 33^'20^'nnn 

Loans  to  Allies  (p.  17) ! ! : ! ! ! .' !     7,^,^ 

Total  expenditures 19,649,495,223 

.t^V!'"^'"^  V'.iy«'"'7a«  ""er  the  expenditures  turned  out  to  be  only 
about  fourteen  bjhons,  far  less  than  the  secretary  had  estimated.  This 
made  the  actual  proportion  of  war  expenditures  derived  from  war  taxes 
24.8%.   In  the  following  year  It  was  only  18.6%.  See  the  table,  tj^ro  p  "767 


^ 


690 


ESSAYS  IN  TAXATION 


I 


significant  that  the  secretary  of  the  treasury,  who  at  the  outset 
propounded  the  50-50  per  cent  theory—that  one-half  of  the 
war  expenditures  should  be  defrayed  by  war  taxes— should 
have  arrived  in  his  annual  report  in  December  at  the  unde- 
sirability  of  levying  any  more  taxes  for  the  present.^  This 
conclusion  was  evidently  forced  upon  him  by  the  financial  de- 
pression which  supervened  in  the  last  quarter  of  1917  and 
which  was  popularly  ascribed  to  the  new  tax  law.  As  a  matter 
of  fact,  the  law  was  only  partly  responsible;  and  in  so  far  as 
there  was  any  responsibility  at  all,  the  cause  is  to  be  sought, 
as  we  shall  see,  in  the  defects  of  the  law,  rather  than  in  the  sum 
to  he  raised.  We  may  conclude,  therefore,  that  the  new  law 
does  not  err  on  the  side  of  excessive  taxation.  But  it  is  probable 
that  about  as  much  is  sought  to  be  raised  by  taxation  as  is 
prudent  at  the  timo.^  Not  only  the  amount,  but  the  relative 
proportion,  of  taxation  is  a  far  heavier  one  than  has  ever  been 
previously  attempted  in  the  first  year  of  war. 

We  now  come  to  the  question  of  how  this  burden  is  distrib- 
uted. The  old-time  classification  of  taxes  into  direct  and  in- 
direct not  only  has  lost  its  former  usefulness  but  is  without 
scientific  foundation.  In  fonner  times,  when  the  mass  of  in- 
direct taxes  rested  upon  the  poorer  classes,  the  distinction  cor- 
responded roughly  to  the  contrast  between  wealth  and  poverty, 
and  the  abolition  of  indirect  taxes  accordingly  became  a  lead- 
ing demand  of  social  reformers.  In  modern  times  where  the 
so-called  indirect  taxes  have  largely  been  removed  from  the 
necessaries  of  life,  and  imposed  upon  luxuries  or  articles  of 
harmful  consumption,  the  contrast  has  lost  its  point.  Indirect 
taxes  are  no  longer  necessarily  taxes  upon  the  poor.  But  in 
the  second  place,  the  criterion  of  distinction  has  been  aban- 
doned by  modern  science.  In  direct  taxes,  the  taxpayer  is 
supposed  to  be  the  taxbearer;  in  indirect  taxes,  one  man  pays 
the  tax  and  another  is  supposed  ultimately  to  bear  the  burden. 
Even  a  superficial  acquaintance,  however,  with  the  newer 
theories  of  incidence  of  taxation  discloses  the  fact  that  many 
so-called  direct  taxes  are  shifted  and  many  so-called  indirect 

^  "  It  is  my  earnest  conviction  that  the  general  economy  of  the  war 
should  be  permittee!  to  readjust  itself  to  the  new  revenue  laws  before 
consideration  should  be  given  to  the  imposition  of  additional  tax  bur- 
dens."   Report,  p.  4. 

2  The  new  law  of  1919  increased  the  war  tax  revenue  from  $3,2.53  to 
$3,874  millions,  in  the  face  of  an  increase  of  war  expenditures  from  13  to 
ahnost  18  billions.    Cf.  the  table,  infra,  p.  714. 


THE  WAR  REVENUE  ACTS  691 

taxes  may  be  borne  by  the  npr«=!nn  xxrhr.  ^  •  •     i, 
Even  to  relegate  the  diltiLrn Ttt  S'of  t^h^f  *'?  i^" 
as  was  suggested  by  John  Stuart  MUl   hats  iftl   ^^f'^'^' 
present  aw,  for  instnnno  r>-^  „      i  '  .    P®  ""'6-    In  the 

tention  of    he  iSator  that  fL   ""''  ^^'''^"'  "  ^"^  *e  in- 

called  excise  tax^fi  d  f>e  pS  bv'th:"n'  T'  ''  *'»^  ^ 
consumer.    In  the  a.utnTnulT  uKu    ■  Pi-o^ucer  or  by  the 

i"  Congress.  But even^umi^J' ^)  ^'"^^  ^"''  represented 
most  of  the  excfee  tIxes^r^Tn,^'7^*  ''  "°*  mprobable,  that 
what  shall  we  2  of Te  mn/nT  w  *°  *■?*  °"  '^^  """^^^er, 

tinctly  declaresTaU t:  ^^tT'^^J^tr'V'^  t^ 
tax,  then,  indirect  and  fhi  ,>,^f    i      x  .  ^^  ^'^^  automobi  e 

we  deela.  all  ^f^^ efcLTxitdt'^et^Toi  0^^^^"  ' 
imposed  on  luxuries  and  ih^^o  f.-i  .    "™^'  "^^^t  ot  them  are 

teristic  which  hZhkhe^'Zlt^^Zt-  f''  ''"''''- 
The  djtinetion,  therefore,  isZthZ^^ I^t'^ST  ''^''"• 

taxitnteir bSr  elr  "r^  r«*'-  ^  that  into 
term,  including  tmnsnolHnn     ^^  ^"^  '^^  ^^^**  ^^"^^  °f  the 
Rene;  and  pow^rand  eonsZntiL  ''rTr '^'^tion  of  intelli- 
be  subdivided  into  taxes  on  T^?'  ^'t  '*'*  '^^"^^'y  "^^^ht 
and  on  or^inaTeSrure      ™7f''T  .^'  consumption 
might  he  further  comS«J  into  SZ'  f""':'^"'^    classification 
on  wealth  and  luxurTonlh.  nnl  i!    J^"*'.""*'""  ''"tween  taxes 
sumption  on  the  other    Rnl      ^"**  ^"''  °"  *•»«  ""^  "^  «on- 
in  the  first  division  and  t^v  ^""T  ^°"'^  *'''^"  ^e  included 

taxes  on  exSiture  Jrw  S]l' W  ^"^\'"  '^^  «^°"^'  ^^^^ 

second,  accorTngtoTheTr nlre    Th:  "f'\  '""^  ^*  "'  '"^^ 
fication  is  that  it  is  ant  m  th"      ..^^e  advantage  of  this  classi- 

interest  to  modem  democrtr.K^  '  ""/"j.!  ""'"«'»  "^  "^Wef 
tax  burdens  J:Ten1hTS^a;;5lheTof^  '^'^*^^  °^ 

«ttrotf fo—  ScX^  tt  SthTTo'r 
.^XTi'-ciiraLiot^^^^^^^^^ 

on  income.    The  nresenH.,?  •   ■  "  P''°Perty  as  weU  as 

tax;  but  it  is  notTan  unl  kXTf'  '*  ''  *"'*'■  ""'^  ^"  i"^"™^ 
on  land  or  other  propertv^h.  T.  ""7  "^"^  ^^""^  "^  tax 
within  the  same  gro'^uTSpecT^:  oftt%tstrwhet  '^" 

included,  as  we  sha^U  s^e^  S,  Z^^-L'lZi:^,^,^, 


692 


ESSAYS  IN  TAXATION 


III! 
I 


the  corporate-income  tax.  In  the  third  group,  taxes  on  ex- 
change, would  be  comprised  the  so-called  war  taxes  on  facilities 
furnished  by  pubHc  utiUties,  and  the  stamp  taxes.  To  the 
first  division  of  the  fourth  group,  taxes  on  injurious  or  harmful 
consumption,  should  be  assigned  the  taxes  on  beverages,  ad- 
missions and  dues,  leaving  for  the  second  subdivision  customs 
duties  and  the  insurance  tax.  This  disposes  of  everything  ex- 
cept the  so-called  excise  taxes,  which  will  probably  best  fit  into 
the  subdivision  of  taxes  on  luxurious  consumption.  But  even 
if  they  should  be  classified  under  business  taxes,  it  would  make 
little  difference,  because  in  either  case  they  would  fall  within 
the  first  of  two  main  divisions,  taxes  on  wealth  and  luxury  as 
against  taxes  on  general  consumption. 

According  to  this  classification,  the  new  taxes  on  wealth 
amount  to  about  74  per  cent  of  the  whole,  the  taxes  on  lux- 
urious or  harmful  consumption  to  about  13  per  cent,  and  the 
taxes  on  exchange  and  general  expenditure  to  a  little  less  than 
13  per  cent.*  This  record  is  almost  as  good  as  that  of  Great 
Britain,  where  an  even  larger  proportion  of  the  new  war  taxes 
has  been  derived  from  wealth  or  luxurious  or  harmful  consump- 
tion. It  is  significant  evidence  of  the  progress  that  has  been 
made  in  the  conceptions  of  fiscal  justice  as  a  result  of  the  dem- 
ocratic development  of  the  last  generation.  The  contrast  of 
this  distribution  with  that  of  the  Civil  War  period  could  not  be 
more  striking. 

Since,  therefore,  the  overwhelming  proportion  of  the  new 
revenue  was  to  come  from  taxes  on  income  and  excess  profits, 

1  Distribution  of  War  Taxes  (in  Millions  of  Dollars) 

Wealth 

Income $851 

Excess  Profits 1,000      [      =     $1,856,  or  13  per  cent 

Estate 5     J 

Luxuries  and  Harmful  Consumption 

Liquors 269 . 4  T 

Excises 58.7  J      ""     ^^^-  ^'  ^^  ^^  ^^  cent 

Exchange 
Transportation 157.3 


Telegraph,  etc 7 . 

Stamp 29. 

Postage 76.    , 

Admissions 51 . 1 

Insurance 76. 


=     $269. 

Expenditure 
=     $56.1 


=$325.1,  or  12.6  per  cent 


i 


riUM 


THE  WAR  REVENUE  ACTS  693 

S  ^ht'itre?'^^^*^*'""  °^  '''  ^-  --'  dea,  primarily 

IV.  The  Income  Tax 

the  passage  of  the  law  in  1913.'    As  was  iS«hl  •  ^ 

wnter  was  chainnan  and  shortly  thereafter  nL  a  ft  ^X  3"^ 
gested  amendments  were  adopted  ^ 

iJ^Z"^'''^  ^""T^  °^  *'••'  ^«*  °^  September  8,  1916  referred 

JL  offh  ""^  *°,r"''"  ''"'''^'^  '«^e°ue.    Accordingly  "he 
rate  of  the  normal  tax  was  increased  to  2  per  cent  ^dtl'J^t 
the  additional  tax  to  a  scale  of  from  1  to  13  ner  ce^t     Oth 
important  changes  in  the  law  were  as  foltott'aVthe  tax  ^^^^ 

not  exceed  the  profits  therefrom;  (4)  in  ihe  caLe  of  oTl^ 

^^f^^:.s:ft  d  =-  ~"- 

allowed  to  deduct  a  Proportionate  stS^iJpSerhipT 
come  which  would  be  exempted  if  taxed  to  indSk  m 
provisions  was  made  for  the  publication  of  full  ™dt.ua?i 
statistics  Among  the  minor  changes  were  those  r«,uSraII 
mdmduals  to  make  a  return  of  dividends  rec^ZlTZuf. 

accruals  m  lieu  of  that  of  actual  receipts,  and  allowing  thp 

rmXr^tir ™^^  ^^~  '^  ^-'  -  exteniir^ti:;: 

While  the  law  of  1916  resulted  in  a  revenue  of  ^hnnf  qaa 

a^bttTi?"  1  ''''  ^^  ^^^•^•'^  toTcTase  th 'Sd'S 
about  a  billion  and  a  quarter  dolto.    The  chief  contenfof  the 


I 


694 


ESSAYS  IN  TAXATION 


w 


H 


law,  therefore,  consists  in  changes  of  rates.  Advantage  was  also 
taken  of  the  opportunity  to  make  alterations  in  other  provisions 
The  change  in  rates  was  of  a  threefold  character:  an  increase 
of  the  nonnal  tax,  a  lowering  of  the  exemption,  and  a  rise  in 
the  scale  of  progression.  A  supplementary  nonnal  tax  of  2 
per  cent  was  imposed,  bringing  the  total  to  4  per  cent.  The  law 
furthermore  provides  for  a  reform  that  had  been  widely  urged 
by  those  who  considered  the  exemption  of  $3,000-4,000  entirely 
too  high.  Accordingly,  in  the  case  of  the  supplementary 
normal  tax  the  exemption  was  reduced  to  $1,000  for  unmarried 
and  $2,000  for  married  persons.  The  law  also  provides  for  an 
additional  exemption  of  $200  for  each  child  under  eighteen 
years  of  age  or  incapable  of  self-suppoit  because  of  mental  or 
physical  defect. 

In  order  to  counterbalance  this  reduction,  which  will  bring 
into  the  toils  of  the  law  iniUions  of  new  taxpayers,  the  rates  on 
the  higher  incomes  were  sharply  increased.  The  original  law  it 
will  be  remembered,  had  provided  for  a  so-called  additional  tax 
(popularly  called  the  surtax  or,  sometimes,  the  supertax)  on  all 
incomes  over  $20,000,  ranging  from  1  to  8  per  cent  on  the 
highest  amounts.  The  law  of  1916,  as  we  have  noted,  increased 
the  graduated  scale  so  as  to  run  from  1  to  13  per  cent  The 
law  of  1917  reduced  to  $5,000  the  amount  at  which  graduation 
begins  and  provided  an  entirely  different  scale,  ranging  from  1 
to  50  per  cent,  for  the  supplementary  additional  tax.  The 
result  IS  that  the  maximum  rate  was  now  67  per  cent  that  is  2 
per  cent  old  nonnal  tax,  2  per  cent  supplementary  nonnal  tax 
IS  per  cent  old  additional  tax  and  50  per  cent  new  additional 
tax.^ 

This  is  the  highwater  mark  thus  far  reached  in  the  history  of 
taxation.  Never  before,  in  the  annals  of  civilization,  has  an 
attempt  been  made  to  take  as  much  as  two-thirds  of  a  man's 
income  by  taxation.  The  nearest  approach  was  during  the 
great  pohtical  struggles  in  mediaeval  Italy,  where,  as  in  Florence 
the  income  tax  once  reached  a  figure  of  50  per  cent.-    In  com- 

» The  1918  act  went  still  further  in  making  the  maximum  77%  on  ixir- 
tions  of  income  oyer  a  million  dollars.  This  was  accomplished  by  making 
the  normal  rate  12%  (reduced  to  6%  in  the  first  $4,000  of  taxable  income) 
and  the  surtax  65%.  For  1919  the  normal  rates  were  reduced  to  8%  and 
WrJ^Trn  "^  ^""^  "^^  maximum  rate  73%,  C/.  the  AppSidix, 
1908^'  ^^^^"'  ^'■^S^^^**^  Taxation  in  Theory  and  Practice,  2d  edition, 


THE  WAR  REVENUE  ACTS  695 

paring  our  present  income  tax  with  the  British  moreover  if  i« 
to  be  noted  that  our  rates  are  much  highe  t\X  W^^^^^^^ 
comeB  and  much  smaller  on  the  lower  and  molmL  LTmes" 
The  American  scale  is  an  eloquent  testimony  to  the  fact  IS 

bSVrsfthri'h" "'  'T"  ~^^"^  ^-^  tSn  io2 

Dut  also  that  there  is  greater  appreciation  of  the  democratir 
principles  of  fiscal  justice.     For  the  overwhel^nL  tTnd  of 
modern  opinion  is  clearly  in  the  direction  of  apS   o  ex^s 
sive  fortunes  the  principle  of  faculty  or  ability  to  pay     It  s^^^^ 
remmns  to  be  seen,  however,  whether  the  mvZ^Jkh  Lt 
ceedingly  high  rates,  will  turn  out  to  be  as  workabfe  adminls" 

thJ^llT"^  ?^^"^'  ^"  *^'  ^^^  ^^  *^^  ^i^tual  abandonment  of 
£red  tK^^^  '^  ^^"^^^^^'^^    I*  ^i"  be  remem- 

Sdlrinl  tho"^^^^  'T'  ''  "^^"^^  *^^  '^^'  h-d  devel- 

opea  uuiing  the  last  generation  were  the  so-called  himn  «„m 

method  of  Prussia  and  the  schedule  method  of  Gre^^^^^^ 

astrnTeTZ^^^^^^  f  ^^'  '''''''  ^"^"^  "P-  accurl  oS^^ 
assessment,  depended  for  its  success  upon  an  incorruotible  rfvil 

nij,  iciise  reiuins.  Great  Bntam  had  lone  since  abflnrlnn^ri  ^h^ 
scheme  and  had  suhstituted  the  plan  offmSfthe  ts^ons^ 
bihty  of  the  tax  upon  the  pereon  who  paid  the  incomeTtW 
than  upon  the  recipient.  As  between  the  unchecke "^^"5^ 
and  the  stoppage-at-source  method  it  is  clear  that  ,.nZ 
American  conditions  the  latter  was  preferahl^  A  rf^  i 
however  of  the  discussion  in  1913  In'ltSve  pL^  wastu^I 
g^ted  to  which  the  present  writer  gave  the  namnHnWa- 
tKn    'i'"'''  'l^''^"^  *°  ^'''^'•'^^  the  substantial  purpos^of 

complications  This  alteration,  which  almost  succeeded  in 
1913  and  again  m  1916,  and  which  was  warmly  espS  bv 
the  income-tax  committee  of  the  National  Tax  Association 

upon  the  payers  of  inl^mTail  oVrg^e  S 12^ 
tion  of  the  amount  and  conditions  of  payment  I„fom?JH„n 
IS  required  from  corporations  as  to  di^id™pUent™tm 

for  a  reJuCion  of  the  excessive  "urtoS'.  **  ""t, on-wide  movement 


i 


I 


ii 


II I 


696 


ESSAYS  IN  TAXATION 


h 


brokers  as  to  details  of  transactions;  and,  in  general,  from  all 
persons  making  payment  to  any  other  person  of  any  "fixed  or 
determinable  gains,  profits  and  income  over  $800."  Only  two 
exceptions  pei-mitted.  Withholding  at  the  source  is  retained 
for  the  original  normal  tax  in  the  case  of  income  accruing  to 
non-resident  aliens  and  of  interest  on  tax-free  bonds.  The 
latter  exception  was  inserted  as  a  concession  to  bondholders 
who,  relying  upon  the  promise  of  the  corporations  to  assume 
the  tax,  had  paid  so  much  more  for  the  l)onds.  It  is  to  be  re- 
gretted, however,  that  the  law  fails  to  include  the  provision, 
found  in  the  British  statute,  which  prohibits  for  the  future  the 
inclusion  of  such  tax-free  covenants  in  corporate  bonds. 

The  substitution  of  information-at-source  marks  an  ad- 
vance in  the  law,  although  it  still  remains  to  be  seen  whether 
the  new  system  will  prove  more  effective  or  less  cumbrous  than 
the  old.  In  any  event,  however,  the  chief  objection  to  the 
uncontrolled  lump-sum  method,  employed  in  our  earHer  in- 
come-tax laws,  has  been  removed. 

On  the  fundamental  question  of  what  constitutes  income  the 
new  law  does  not  take  any  fresh  stand.  This  still  remains  a 
difficulty  which,  however,  not  only  is  shared  by  many  other  in- 
come-tax laws  but  is  traceable  to  an  inadequate  analysis.  The 
distinction  betwen  capital  and  income  has  received  far  less 
scientific  attention  than  it  deserves.  It  may  be  said  that  there 
are  at  least  three  different  conceptions  of  income  found  in  eco- 
nomic Hterature:  the  one  emphasizes  the  idea  of  regularity  or 
recurrence;  the  second  accentuates  the  idea  of  product  or 
return  from  an  enduring  source;  the  third,  or  net-profit  theory, 
lays  stress  on  the  surplus  of  what  comes  in  over  what  goes  out! 
It  is  impossible  here  to  discuss  the  widely  divergent  practical 
consequences  of  these  theories.  It  may  be  said,  however,  that 
until  economists  have  decided  which  of  the  three  is  correct,  the 
interpretation  of  the  law  is  bound  to  create  endless  trouble. 
Some  of  the  chief  difliculties  of  the  interpretation  are  still 
associated  with  the  question  of  stock  dividends  and  depreciation 
in  the  market  value  of  securities.^ 

*  For  a  subsequent  discussion  of  the  concept  of  income  see  an  article  by  the 
present  writer  on  "Are  Stock  Dividends  Income  "  in  The  American  Economic 
Review,  vol.  ix.  (1919)  pp.  517-536;  the  article  by  R.  M.  Haig  in  The  Federal 
Income  Tax.  Columbia  University  Lectures,  1921,  pp.  1-18;  and  F.  R 
Fairchild,  "Federal  Taxation  of  Income  and  Profits"  in  Taxes  and  'Pro- 
ceedings of  the  33d  Anniml  Meeting  of  the  American  5th  Economic  Associa- 
tion in  Atlantic  City,  1920,  1921,  pp.  149  et  seq. 


THE  WAR  REVENUE  ACTS  697 

puKtiL7oTtrv'.n '"^'  ^"  '^'  deductions  permitted  in  the  com- 
o  tif^^  fn!     r         '"T^  ''  ^^""^  *"  *^^  treatment  accord^ 
1?  ir^^^^^         '^'"*"^^^^'  ^"^"^^fi^  «r  educational  pu^ 
!]?!  i!*  u     f    ^.^  ^''"  ""^^  '"  committee,  fear  was  expressed  W 
the  high  rates  should  check  the  flow  of  philanthronT!ift«     t 
order  partly  at  least  to  obviate  a  consejuence  t^^^^^^^^  ^ouid  be 
deplorable  m  a  country  where  charity  is  overwhXiirX  of  ! 
private  character,  it  is  provided  that  all  surSts^^L^ 
ducted,  provided  they  do  not  exceed  fifteen  per  c^nt  of  tht 
taxable  mcome.    This  interesting  departure  is  Tline  titt  the 

tZT^  f -f  !^  ^^  ^^^  '^^^^'^^  for  educational  and  phil!n! 
thropic  mstitutions.  It  is  to  be  regretted,  however  that  in  fh. 
estate  tax  a  similar  provision  has  been  omitted  ^'  '^' 

duItTons  fn  Z''' -'  f^T'  T''  "^"^^  ^  '^'  ^«t  of  de- 
intelrt  on^L^^^^  T       act  a  deduction  was  permitted  for 

wiai,  inasmuch  as  the  first  issue  of  Liberty  Bonds  was  t«Y 
exempt,  it  would  be  profitable  for  individuafs  toTanle  their 
bond  purchases  by  borrowing,  for  they  would  save  the  fLnnI 
only  on  the  bond  interest  received  butLTe  loa"^^^^^^^ 
It  was  to  obviate  this  invitation  to  inflation  and  fiscalTnjus?^^^^ 
that  the  law  excepted  from  the  pennissible  deduct  on  "« 

The  oT''^^  ^T^"^^  "^  ^^^-^^^^  government  bonds 

The  other  pomt  has  reference  to  the  deduction  for  taxes' 
I  IS  plam  that  if  all  taxes  continue  to  be  deducted  the  ment 
of  a  large  mcome  tax  in  any  one  year  will  operate  as  a  San 
aland  progressive  reduction  of  the  tax  in  following  years  ?t 
IS  there  ore  provided  that  the  pemiission  to  deduct  taxes^/ll 
not  apply  to  mcome  and  excess-profits  taxes.    I^any  o^^^^^ 

nerTnVr  '^'  ^'''  ""'^^^'^^^"^  '^^  ^ond  Lues     ThTn^^^^ 
per  cent  bonds  carry  with  them,  as  is  well  known,  an  exemptLn 
from  the  normal  income  tax  only.  exemption 

Up  to  this  point  we  have  discussed  the  individual  income  tax 
The  law,  however,  provides,  as  before,  also  for  a  cornorX  t 
come  tax.    In  addition  to  the  existing  nonnal  ^^^0  "' 
cent,  a  supplementary  tax  of  four  per  cent  is  imposed  un^n  ^Z 
mcome  of  every  corporation.  Joint  stock  companToTassoSio^^^ 

This  oversight  was  corrected  in  the  act  of  1918. 


I 


698 


ESSAYS  IN  TAXATION 


n 

i 


or  insurance  company,  but  not  including  partnerships.  The 
result  is  that  corporations  will  hereafter  pay  a  tax  of  six  per 
cent  on  their  income.  ^  In  computing  the  tax,  however,  all 
dividends  received  by  one  corporation  from  another  taxable 
corporation  are  deductible— an  important  concession  to  holding 
companies  but  a  concession  limited  to  the  supplementary  tax.^ 
The  limitations  on  the  deduction  for  interest  and  taxes  referred 
to  above  in  the  case  of  individuals  are  applicable  also  to  cor- 
porations, as  is  the  provision  pemiitting  the  crediting  to  income 
of  the  excess-profits  tax  levied  in  the  same  year. 

Corporations,  however,  are  subject  to  a  further  tax  of  ten  per 
cent  on  the  amount  of  profits  remaining  xmdistributed  six 
months  after  the  end  of  the  year.  Income  actually  invested  in 
business  or  in  federal  bonds  is  exempted  from  this  additional 
tax;  but  if  it  transpires  that  profits  retained  for  employment  in 
the  business  are  not  so  employed  or  are  not  reasonably  required 
therein,  they  shall  })e  subject  to  a  tax  of  fifteen  per  cent.  It  may 
be  conjectured  that  these  provisions,  if  enforced,  will  lead  to 
a  speedy  distribution  of  all  corporate  profits  that  should  prop- 
erly go  to  the  stockholders,  and  perhaps  of  some  that  ought 
properly  to  be  reinvested  in  the  business.' 

Finally,  attention  may  be  called  to  a  provision  permitting 
the  payment  of  the  income  tax,  both  corporate  and  individual,  in 
instalments  of  twenty-five  per  cent  at  intervals  of  one,  two  and 
four  months  after  the  close  of  the  taxable  year,  the  final  instal- 
ment to  be  payable  by  June  15,  as  before. 

In  any  fair  estimate  of  the  present  law  five  defects  may  be 
noted,  some  of  them  survivals,  some  of  them  additions. 

The  first  weakness  is  the  failure  to  introduce  differentiation 
between  earned  and  unearnd  income.  An  attempt  was  made 
to  persuade  Congress  to  adopt  this  distinction,  which,  as  is  well 
known,  was  initiated  in  Great  Britain  almost  a  decade  ago.  The 
reason  advanced  for  the  refusal— the  fear  of  further  complicat- 
ing the  tax— is  far  from  convincing.  Simplicity  gained  at  the 
expense  of  equity  is  not  to  be  admired.  The  situation  is  in 
fact  aggravated  by  the  extension  of  the  excess-profits  tax  to 
professional  incomes,  as  a  result  of  which,  earned  incomes,  in- 

» The  law  of  1918  increased  the  rate  of  the  corporation  tax  to  12%  for 
1918,  and  10%  thereafter.    An  initial  exemption  of  $2,000  was  allowed. 

2  The  law  of  1918  abolished  this  limitation,  as  well  as  that  on  the  amount 
of  deductible  interest. 

3  The  undistributed  property  tax  was  dropped  in  the  law  of  1918. 


THE  WAR  REVENUE  ACTS  699 

stead  of  being  taxed  less,  will  actually  be  taxed  more  than 
unearned  mcomes.    This  is  of  course  a  travesty  of  justice. 

Ihe  second  defect  is  that  returns,  instead  of  being  demanded 
from  every  one,  are  required  only  from  the  non-exempt  classed 
tnat  IS,  from  those  whose  income  exceeds  $1,000-2,000  or  13,000^ 
4000  respectively.!  This,  coupled  with  the  failure  to  compel 
a  return  of  income  from  government  tax-free  bonds  will 
prevent  the  collection  of  valuable  information  as  to  the'  total 
social  mcome  and  its  distribution.  A  return,  including  the 
entire  income,  should  be  required,  as  is  ahnost  uniformly  the 
ease  elsewhere,  from  every  citizen. 

Third,  the  provision  as  to  the  calculation  of  losses  and  gains 
IS  still  inequitable.    On  any  one  of  the  three  different  theories 
ot  income  referred  to  above,  our  present  practice  of  counting  cer- 
tain gams  as  income  and  of  refusing  to  allow  for  corresponding 
losses  IS  not  onlyindefensible,  butsure  to  create  gross  inequalities.^ 
In  the  fourth  place,  the  treatment  accorded  to  dividends  is 
highly  questionable     Dividends  must,  indeed,  be  reported  by 
ndividuals  and,  although  not  subject  to  the  ordinary  normal 
tax,  are  liable  to  both  the  supplementary  normal  tax  and  the 
additional  taxes     A  new  section,  however,  provides  that  divi- 
dends are  taxable  at  the  rates  prescribed  for  the  years  in  which 
the  corporate  profits  are  accumulated.    This  is  unjust  because 
the  dividends  ought  to  be  considered  income  when  received 
irrespective  of  when  the  profits  were  earned.    If  the  war  should 
ast  several  years  and  be  attended  by  an  increase  of  war  taxes, 
it  IS  likely  that  many  wealthy  stockholders  will  escape  by  the 
fact  of  the  corporate  profits  having  been  originally  earned  in 
the  period  before  the  high  taxes  were  imposed.    Moreover  the 
law  will  probably  be  so  complicated  as  not  to  be  easy  of  en- 

amount  of  dividend  may  form  an  entirely  different  proportion 
of  that  mcome  from  year  to  year.  It  will  be  increasingly  diffi- 
cult therefore,  to  admmister  the  provision.  In  the  meantime, 
great  confusion  will  ensue.^ 

rs^VZy'^rr  q'/^'  ^^"//^  ^^^^  ^^  ^'^^5,114  as  compared  with 

2  This  defect  was  partly  removed  by  the  law  of  1918  which  permits  the 
deduction  of  a  1  losses  whether  incurred  in  trade  or  othemise 

yeX^^L^l  ""^^  "^"^  *^^^'^^  ''  ^^^  -te  in  "force  in  the 


' 


700 


ESSAYS  IN  TAXATION 


f 


The  final  defect  is  that  no  machinery  has  yet  been  devised 
to  check  the  returns  from  individuals  enpjaged  in  l)usiness  or 
occupations.  In  the  case  of  large  corporations  and  partner- 
ships, as  well  as  individual  incomes  from  securities,  the  system 
of  information-at-source,  together  with  the  observance  of 
modern  accounting  rules,  will  in  all  probability  ensure  fair 
accuracy  in  the  returns.  But  where  neither  of  these  safeguards 
is  applicable,  a  large  loophole  is  left  open.  Where  the  rates 
of  taxation  are  as  high  as  at  present,  the  dangers  of  evasion 
are  multiplied;  and  evasion  means  not  only  loss  of  revenue, 
but  inequality.  Much  has  been  done  elsewhere  to  institute 
checks  designed  to  diminish  this  danger.  While  some  of  the 
statements  *  advanced  in  and  out  of  Congress  as  to  the  wide- 
spread evasions  in  the  present  law  are  clearly  exaggerated,  there 
is  still  room  for  decided  improvement  in  administration. 

V.  The  Excess-Profits  Tax 

Although  the  income  tax,  both  old  and  new,  is  designed  to 
provide  about  the  same  revenue  as  the  excess-profits  tax  -  the 
latter  is  the  novel  part  of  the  law.    What  is  its  significance? 

The  first  point  to  be  emphasized  is  that  it  is  a  business  tax. 
The  criteria  that  may  be  employed  in  classifying  taxes  are 
manifold.  For  the  purpose,  however,  of  explaining  this  new 
impost  it  will  suffice  to  observe  that  taxes  on  wealth  are  sus- 
ceptible of  a  threefold  division.  The  tax  may  be  on  either 
property  or  income;  on  either  individuals  or  corporations;  on 
either  persons  or  things.  It  is  this  last  distinction  which  is  of 
consequence  here — the  distinction  which  the  lawyers  make  be- 
tween taxes  in  personam  and  in  rem.  Among  the  *' things" 
on  which  taxes  may  be  imposed  are  land,  capital  and  business. 
The  excess-profits  tax  is  one  on  the  business,  irrespective  of 
the  person  who  conducts  it.  It  is  like  the  real-estate  tax  in 
New  York,  assessed  on  the  land,  without  regard  to  the  owner. 
The  objection,  therefore,  is  not  valid  that  because  the  tax  is 
imposed  on  profits,  it  constitutes  doul)le  taxation,  in  superim- 

*  Cf.  The  United  States  Income  Tax  Steal?  The  Facts  and  the  Proofs  about 
$320,000,000  taken  Annually  by  the  Rich  from  the  U.  S.  Treasury.  By 
Basil  M.  Manley. 

*  Income  tax  1,201  millions;  excess  profits  tax  1,226  millions.  See  Re- 
port of  the  Secretary  of  Treasury  for  1917,  p.  71. 

As  a  matter  of  fact  the  income  tax  yielded  1,094  and  the  excess-profits 
tax  1,844  millions  in  1917. 


THE  WAR  REVENUE  ACTS  701 

Z"nfT  ^"'/i"^\^.^f  upon  another.    This  is  the  same  confu- 
sion of  thought  which  has  led  some  writers  to  object  to  the 
inclusion  of  a  corporate-income  tax  in  a  law  which  endeavors 
to  reach  the  entire  income  of  the  individual.    The  corporate- 
income  tax,  like  the  excess-profits  tax,  is  a  tax  on  the  business 
not  a  tax  on  the  individual;  a  tax  on  a  thing,  not  on  a  person! 
In  the  second  place,  the  excess-profits  tax  is  not  a  war- 
profits  tax,  if  by  this  term  we  mean  a  tax  imposed  upon  the 
additional  profits  resulting  from  the  war.    This  constitutes  its 
chief  difference  from  the  war-profits  taxes  levied  elsewhere 

1  he  almost  simultaneous  institution  of  the  war-profits  taxes 
abroad  is  easy  of  comprehension.    Never  before  in  the  history 
of  the  world  have  such  gigantic  sums  been  expended  by  bel- 
hgerents  or  have  such    colossal  gains  been  made  by  private 
individuals  m  belligerent  and  neutral  countries  alike.    It  wa^  a 
natural  feeling  that  no  private  enterprise  should  be  permitted 
to  make  inordinate  gains  out  of  the  misery  of  humanity,  and 
that  the  community  is  entitled  to  a  great  part  of  the  profils  for 
which  no  individual  enterprise  is  really  responsible.    The  con- 
sequence was  that  the  government  everywhere  put  in  a  claim  to 
a  large  share  of  these  profits  due  to  the  war.    The  proportion 
has  risen  m  some  countries  to  eighty  or  ninety  per  cent,  and  the 
war  profits  have  m  general  been  defined  as  the  excess  of  profits 
during  the  war  over  those  during  a  pre-war  period. 

The  reason  which  induced  Congress  to  modify  this  principle 
was  that  not  a  few  of  our  largest  business  enterprises  had  been 
making  immense  profits  in  the  pre-war  period,  and  that,  inas- 
much as  the  profits,  both  past  and  present,  were  scarcely  being 
touched  by  the  corporate-income  tax,  these  enterprises  would 
virtually  be  exempt,  while  their  more  unfortunate  competitors 
who  had  done  relatively  poorly  during  the  pre-war  period,' 
would  now  be  heavily  burdened.    The  decision  was  therefore 
reached  to  levy  the  tax  not  on  war  profits  as  such,  but  on  ex- 
cess profits  in  general.     Although  the  tax  is  caUed  the  "war 
excess  profits  tax,"  the  terni  really  means  the  tax  on  excess 
profits  levied  during  the  war,  just  as  the  terms  "war  excise 
taxes    or    war  income  tax"  mean  the  respective  taxes  levied 
during  the  war. 

The  significant  fact,  however,  is  that  nothing  is  said  about 
the  hmitation  of  the  tax  to  the  period  of  the  war  In  the 
war-profits  taxes  abroad  the  taxes  cease  automatically  with  the 
end  of  the  war,  for  where  there  is  no  war  there  can  be  no  war 


I 


♦  I 


702 


ESSAYS  IN  TAXATION 


•if 


ll 


r 


profits.  It  is  entirely  possible,  however,  for  our  tax  to  continue 
after  the  war,  just  as  it  is  possible  that  fiscal  exigencies  may 
compel  the  continuance,  in  whole  or  in  part,  of  our  war  income 
tax  or  of  our  war  excises.  It  will  be  seen,  therefore,  that  we 
have  here,  ready  to  hand,  a  potential  source  of  the  future 
mcome  which  will  be  so  sorely  needed  hereafter,  and  for  which 
European  statesmen  and  publicists  have  been  dimly  groping. 

It  has  been  thought  by  some  that  the  principle  is  something 
new  in  taxation.  Professor  T.  S.  Adams,  for  instance,  empha- 
sizes the  fact  ^  that  it  is  a  reversion  to  the  benefit  theory  of  taxa- 
tion and  is  to  be  considered  as  an  extension  of  the  special- 
assessment  doctrine. 

Both  of  these  statements,  however,  involve  a  partial  miscon- 
ception. The  essence  of  a  special  assessment  consists  of  a 
measurable  benefit  accruing  to  an  individual  as  a  member  of  a 
definite  area,  from  a  particular  service  rendered,  and  caUing 
for  an  outlay,  by  the  government.  In  a  tax  there  is  never 
such  a  particular  service  nor  a  separately  measurable  benefit. 
The  criterion  is  not  benefit  but  faculty  or  ability  to  pay.  The 
confusion  arises  from  the  failure  to  observe,  as  was  pointed  out 
many  years  ago,^  that  ability  connotes  not  only  the  old-time 
consumption  or  sacrifice  element  but  also  the  production  or 
privilege  element.  A  business  tax  is  none  the  less  based  upon 
ability  to  pay  because  the  predominant  criterion  may  consist  in 
the  profits  derived  in  part  from  the  privileges  due  to  the  general 
economic  or  legal  environment.  The  excess-profits  tax  is  a  tax 
m  which,  as  in  many  others,  the  ability  of  the  taxpayer  is  meas- 
ured, in  part  at  least,  by  the  privileges  enjoyed.  It  is  not  to  be 
confounded  with  a  special  assessment.  There  is  no  special 
measurable  benefit  conferred  by  a  particular  service  rendered, 
and  involving  an  outlay,  by  the  government.^ 

I  "Principles  of  Excess-Profits  Taxation,"  in  the  Annals  of  the  American 
Academy  of  Political  and  Social  Science,  volume  Ixxv.,  p.  154;  and  more 
fully  in  "Federal  Taxes  upon  Income  and  Excess  Profits,"  in  the  American 
Economic  Renew,  vol.  viii.,  no.  1,  supplement,  March,  1918,  Papers  and 
Proceedmgs  of  the  30th  Annual  Meeting  of  the  American  Economic  As- 
sociation. In  a  later  paper  "Should  the  Excess-Profits  Tax  be  repealed" 
in  The  Quarterly  Journal  of  Economics,  xxxv.  (1921),  p.  363,  Professor 
Adams  modifies  his  conception. 

^Seligman,  Progressive  Taxation  in  Theory  and  Practice,  1894  p  191- 
cf.  2d  edition,  1918,  pp.  291-292.  Cf.  the  various  passages  in  the  present 
volume,  pp.  340,  418,  438-444. 

'  For  a  fuller  statement  of  this  point  cf.  the  American  Economic  Review, 
vol.  viii.,  no.  1,  supplement,  where  Professor  Adams'  paper  is  considered. 


THE  WAR  REVENUE  ACTS  703 

whll^hThiATT'-'"'  '''''I  ^"^  "^"'^^^^  ^^'^  P^^^ise  way  in 
which  this  new  busmess  tax  has  been  worked  out,  we  find  that 

IS    on  the  Pvn'      T  P^'^fi*^^^"^  «n  ^^^'ess  war  profits,  that 
IS,  on  the  excess  of  war  profits  over  peace  profits.^     Since 
however,  our  plan  is  to  tax  excessive  profits  in  gene  al  rZer 
than  the  excess  over  a  pre-war  standard,  the  criterion  had  to  be 

Sal  St  ""  ^T  ",  P^""^^  P^'^fi^-     ™s  criteln  of 
noimal  profits  is  declared  to  be  a  certain  percentage  of  the 

cTS  li;Tnr^  P^^^^^  being'utilized'or:Jy  in- 

cidentally m  ascertammg  this  nomial  percentage.    That  is  to 

TlocJ^TT^'''''''  P^'"^'^^'  '^'  ^^^  *^kes  the  excess  over 

sumTS^^^^^^  ?'  ""^"^  ^'"^""^^  '^^^^'^^  -^  -  fixed 

sum  (S3  000  for  domestic  corporations,  or  $6,000  for  partner- 
ships, citizens  or  residents),  together  with  an 'amount  Tqual  t^ 
the  percentage  of  the  invested  capital  represented  by  the  average 

perc" Lr^^^^^  ''^  r-r'  P^^-^'  P--^-l  thTthi 

cent  of  th  /^  " Vu^'"  ^'^  ^^'^  *^^^  ^  ^^^  "^«^^  than  9  per 

Td  ffom  loTHf  lo??'  ?'"^'"^  r^^  ^«  held  to  be  the  Je- 

[stencH    f^n  \^''  r"  *h^  ^"^^"^««  ^^«  "«t  in  ex- 

istence in  those  years,  the  deduction  is  fixed  at  8  per  cent 
instead  of  the  7-9  ner  rpnf      AnH  it,  «„.    +u  • 

or  a  veo.  ,ow  i^^oZ  Zn,tt  :r:Zt^X''<:^^: 

ces^Zfiti't^'^  ""'  °^  "°™^'  P™*'*^  ^--^  ""-"Puted  the  ex- 
fiZ  „?9n'  .  ™T  P'-°g'-e««ively  with  the  excess,  being 

ner  cent  1  tl  '"     °"    ^  ""'"''  P'^'^*'  "^  ^°  ^^  P^""  <=«"*;  ^f 
per  cent  on  the  excess  from  15  to  20  per  cent;  35  per  cent 

cL  from'^T,'"  '°  ''  P^^  •"'"*'•  45  P^^  «-»t  -^he  ex- 
Stsrer^^e^c^t.-"*^  ^"'  ""  ^'  ^^"*  °"  '"^^  ™ 

moJ^avoS  Z^'^^'T'  °"'^  permitted  ^  an  alternative,  when 
S  rta™ste^%fpLr''E^!:;'  't  r?'"'"'  "P--tage  standard" 
terprl  thnrTlLTT^  Capital,    tvcn  though  far  more  successfully  adminis- 

after    he  war  ^"STV^^'  "J""  ".'^"^'''^  ^  '^^  »  '^^  as^Se 
r;!V     ,•       ,  J"  "^  "'""'"Kh  study  of  its  working  cf   R    M    Haiff 
n.  Taction  of  Excess  Profits  in  Great  Britain,  Americ^.  Lmm^ltZw' 

W  p  m^"'','?nP^'''  ^^-    The  rates  were  as foUows    ms^ '• 
l^u^f"'  ^^^"'  *'^°  1919'  40%;  1920,  60%  '       ""• 

Pml.  T  K  ^  '^'^-  "'""'S^  *•'*  ""^^  t°  the  War-Profits  and  Excess- 
or%^cZ  ^'^''^"^'"t  "o^v ''l^*  granted  a  "war-profits  credit"  consfaw 
perKnlq?^.  T"™*  «'"'",to  the  average  net  income  for  thep^w"? 
period  (1911-1913)  plus  or  minus  10%  of  the  difference  between  the  invested 


■  J 

i 


704 


ESSAYS  IN  TAXATION 


if 


It  IS  obvious  that  the  important  point  here  lies  in  the  compu- 
tation of  capital,  for  with  one  exception  *  income  is  defined 
precisely  alike  in  the  excess-profits  and  the  income-tax  laws. 
The  greater  the  amount  of  the  *' invested  capital"  as  compared 
with  a  given  income,  the  smaller  will  be  the  percentage  and 
the  tax.     What  constitutes  invested  capital,  however,  is  so 
elusive  as  to  be  virtually  impossible  of  precise  computation. 
Not  only  will  there  l)e  gross  inequality  between  businesses  which 
enjoy  the  same  income  but  which  are  variously  capitalized, 
thus  putting  extra  taxation  on  small  artd  conservatively  capital- 
ized concerns;  but  all  manner  of  opportunitv  will  be  afforded 
for  evasion  of  the  law.    The  effort  made  to  define  capital  in 
the  law  is  unavailing.    Invested  capital  is  defined  as  actual  cash 
paid  in,  the  actual  cash  value  of  tangible  property,  and  the 
paid-in  or  earned  surplus  employed  in  the  business.     Patents 
and  copyrights  are  included  up  to  the  par  value  of  the  stock 
paid  therefor  and  the  same  rule  is  declared  applicable  to  the 
goodwill,  trade-marks,  and  franchises  or  other  intangible  prop- 
erty, provided  that  if  purchased  before   1917  the  amount  is 
limited  to  20  per  cent  of  the  capital.    The  inadequacy  of  these 
provisions  is  manifest. 

It  has  been  contended,  in  defense  of  the  law,  that  it  is  on 
the  whole  immaterial  whether  the  criterion  be  sought  in  income 
or  in  capital;  for  capital,  we  are  told,  is  nothing  but  capitalized 
income.2    In  reality,  however,  capital  is  not  capitalized  income; 

capital  for  the  pre-war  period  and  for  the  taxable  year.  The  "excess 
profits  credit"  was  fixed  at  $3,000  phis  8%  of  the  invested  capital.  The 
rates  were  (1)  3%  on  the  excess  of  the  net  income  over  the  excess-profits 
credit  to  20%  of  the  capital,  (2)  G5%  on  the  income  over  20%  of  the  cap- 
ital; and  (3)  the  sum,  if  any,  by  which  30%  of  the  income  in  excess  of  the 
war-profits  credit  exceeded  the  taxes  in  (1)  and  (2).  For  1919  and  there- 
after the  rates  in  (1)  and  (2)  were  reduced  to  20%  and  40%  respectively 
and  the  third  bracket  was  dropped. 

» The  deductions  allowed  from  corporate  gross  income  in  the  excess- 
prohts  tax  foUowetl  the  corporation  excise  tax  law  of  1909  and  not  the 
income-tax  law.  The  difference,  it  will  be  remembered,  is  that  in  the 
former  law  deduction  is  permitted  on  bonded  indebtedness  to  an  amount 
not  exceecUng  the  capital;  whereas  in  the  latter,  the  deduction  was  untU 
1918  limited  to  one-half  the  sum  of  the  bonds  and  stock. 

IS'^uEPL"*  if  J^ade  by  Professor  Adams  in  the  address  cited  supra, 
p.  7U2,  l^ederal  Taxes  upon  Income  and  Excess  Profits."  This  marks  a 
decided  change  of  mind  from  his  earlier  statement  in  Financial  Mobiliza- 
hon  for  War,  Papers  published  by  the  Western  Economic  Society  and  the 
City  Club  of  Chicago,  1917,  p.  117:  "To  that  question  in  this  country  filled 
with  corporations  whose  capital  accounts  mean  nothing,  there  is  only  one 


THE  WAR  REVENUE  ACTS  705 

capital  is  the  capitalization  not  only  of  present  income  but  of 
anticipated  future  income,  which  is  a  very  different  thing  If 
a^  frequently  happens,  the  anticipated  future  income  does  not 
matenahze,  there  is  a  vital  difference  between  a  tax  on  capital 
and  a  tax  on  mcome.  The  objection  to  the  law  still  remains, 
a^  before  that  the  choice  of  capital  not  only  constitutes  a 
clumsy  attempt  to  reach  taxable  ability,  but  introduces  a  gross 
inequality  m  prmciple  and  a  deplorable  uncertainty  in  admin- 
istration. While  something  may  no  doubt  be  done  to  clear  up 
the  ambiguities  and  to  remove  some  crass  inequities,  enough 
will  remam  to  deprive  the  measure  of  a  claim  to  scientific  or 
practical  vahdity. 

The  most  serious  objection  to  the  law,  however,  has  yet  to 
be  mentioned.  Even  assuming  that  the  above  difficulties  were 
removed,  that  the  capital  could  be  accurately  estimated,  and 
that  It  varied  in  amount  proportionally  with  the  income-even 
on  these  unhkely  assumptions,  the  tax  would  still  be  defective 

Ihis  IS  due  to  the  criterion  chosen  for  the  basis  of  the  grad- 
uated scale.    Something  can  be  said  for  a  graduated  tax  on 

TnT?'  uTu^^^.-^''  r^""  ^^  «^i^*  ^«^  ^  graduated  tax  on 
capital;  but  it  is  difficult  to  say  anything  in  defense  of  a  tax 
which  is  graduated  on  the  varying  percentage  which  income 
bears  to  capital.     To  penalize  enterprise  and  ingenuity  in  a 
way  that  is  not  accomplished  by  a  tax  on  either  capital  or  in- 
come—this is  the  unique  distinction  of  the  law.    For   in  the 
farst  place,  while  it  is  true  that  excess  profits  are  sometilnes  the 
result,  m  part  at  least,  of  the  social  environment,  thev  are  not 
mfrequently  to  be  ascribed  to  individual  ability  and  inventive- 
ness    While  It  is  entirely  proper  that  a  share  of  the  profits 
should  go  to  the  community,  it  is  not  at  all  clear  that  the  tax 
should  be  graduated  according  to  the  degree  of  inventiveness 
displayed     But  there  is  a  still  more  important  consideration. 
Almost  all  large  businesses  have  grown  from  humble  begin- 

answer-avoid  the  capital  basis,  whenever  by  human  ingenuity  it  is 
possible  t«  do  so."  The  roguish  commentator  might  possibly  find  a  rein 
for  this  change  of  heart  in  the  fact  that  in  the  interval  Professor  AdZ^ 
had  accepted  an  official  position  in  the  treasury  department  ThissT 
sequent  article,  written  after  the  administration  had  fcided  to  IZhte 
tax,  Professor  Adams  again  changes  his  mind  and  reverts  to  his  original 
thought,  m  the  statement  that  ''the  fundamental  error  is  the  attemp  to 
perpetuate  original  investment  or  cost  value.  The  essential  point  is  that 
the  original  invested  capital  is  a  fictitious  and  unreal  concept/'  Quarterly 
Journal  of  Economics,  xxxv  (1921),  pp.  378,  379.  \i'Mj,,i^ny 


I 


|i 


706 


ESSAYS  IN  TAXATION 


ningg,  and  it  is  precisely  in  these  humble  beginnincs  that  thp 

lZ^'rl'''T°^''  *•?  '""'r^''^'  ^-«*«'  -5 to  be  t 

fXtS  ;„  '"•"?"  ^^^^'^^'^'  *''^''^f'"-«'  •«  the  one  best  cal- 
culated to  repress  industry,  to  check  enterprise  in  its  very  in- 
ception and  to  confer  artificial  advantages  on  large  and^eH- 
establ^hed  concerns.    Nothing  could  be  devised  which  wouW 

the  AmS^n  "^  ™"  '"'""*"'■  *°  '^'  'ong-eBtablished  policy  of 
the^Amencan  government  toward  the  maintenance  of  competi- 

VI.  Conclusion 
In  summing  up  the  above  discussion  we  see  that  the  new  law 

fiJt^t  "f '"f.  ""t  '^'''  "°t«^-orthy  achievements  In  thl 
first  place,  it  will  yield  the  most  colossal  revenue  that  has  ever 
been  attempted  by  a  single  enactment.  To  add,  at  one  stroke 
over  two  and  one-half  billions  to  the  pubUc  income  is  an  unl 
precedented  accomplishment.  It  is  true  that  war  taxation 
covers  only  a  small  part,  of  the  war  expenditure;  hut  U  m  °st 

bv  anv  JTtV^''  '^^  ''  ^''  """''  than  ha«  been  Ze 
by  any  of  the  belhgerents  except  Great  Britain  and  that  it  is 
considerably  more  than  even  Great  Britain  attempted  durhg  the 

Zhi  ^T.     ^^'-    i*  ''  ''"^''■^'y  P^^^'^ble,  as  it  is  highi;  de^ 
su-able,  th^t  increased  taxation  should  be  imposed  during  tht 
successive  yea^  of  the  war.    A  good  beginning,  however  Jas 
bmi  made  and  it  is  fortunate  that  our  legislators  dfd  n;t  a 
this  tune  succumb  to  the  specious  arguments  of  those  who  urged 

IJia,  p.  23,  as   follows:    "It   encouraces  wasteful   pvnpn,l^..„        * 
premium  on  over-capitalization  and  a  nenaltv  on  hrlin?  '/"'^  * 

prise,  discourages  new  ventures  and  Zfi™s'oW  ven tu^sTn'Ti;.""''  *""^'- 
ol.^.    In  many  instances  it  acts  as  a  consumption  tlxL^dS  to  .LTT"^ 
product.™  upon  which  p^fits  are  figured  ?n  dete^ning  prices  :ndT' 
been,  and  will,  so  long  as  it  is  maintained  upon  the  statute  honlf=        .• 
to  be,  a  material  factor  in  the  increased  cost  of  living  "The  va^f* 
last  sentence  may  be  questioned,  for  taxes  on  nel^fits  of  comSive  n' 
dustnes  can  normally  not  be  shifted.    The  only  oxcont  on  T»  ?h. 
state  of  rapidly  rising  prices  there  may  for  a  tSfe  be ToZ^inf^^^    '"  " 
proHts  producer,  so  that  a  tax  on  proBts  may  nl?bo  en^rreraTx  on'sn^ 
plus  and  thus  non-shf table.    But  whether  ev»n  .k.!        K-  ^"' 

tlm>ughout  the  war  is  open  to  doubl    c/ otyTd  Fm7'''pZr7n''' 


THE  WAR  REVENUE  ACTS  707 

stoiw 't,p"S''"A  "'  T">'^'  °f  '^'  ''"^^  ^*'  expenditures 
should   be  defrayed   out  of  taxes  during  the  first  year  of 

Second,  the  law  is  noteworthy  for  an  adoption  of  democratic 
principles  hitherto  unrealized  in  fiscal  history.    To  mZe  the 

fatht'tll"on?hr'°"  2  ^''''f  r ^  •"=^"'--  --Son 
ratner  than  on  the  expenditure  of  the  mass  of  the  people  is  to 

take  an  appreciable  forward  step  in  the  direction  of  Teal  zing 

the  principle  of  abiLty  to  pay.    The  consequence  of  thirstr  de 

orlTr  "'"  '^°"^''^.^^  ^'  "  '^^''"S  °"«'  -"d  we  may  wel  look 

In  tt  f.  ^  rr *"'l""]  "^  '^'  ^^"'^  P™"P'«  ^fter  the  war 
In  the  third  place,  the  law  is  to  be  credited  with  the  adoption 
of  an  mgenious  expedient  in  the  shape  of  the  excess-profits  tax 
This,  as  we  have  pointed  out,  is  not  an  excess  war-Jofits  tax 

result  oT[heTrr'*\*^"  ^"^^  ''■  ^'^-^'^  imposed  i  a 
result  of  the  war,  it  is  a  busmess  tax  on  high  profits  in  general 

This  constitutes  at  once  its  distinction  from  the  suJeSy 

pemanent  feature  of  our  tax  system.  It  is  susceptible  of  vast 
mcrease  durmg  the  war  and  in  a  modified  fonn  of  a  continu^ 

mav':S  'J  ^^'r  *^  ^"'■-  ^'  ^  "°t  ^'  ^1  impossib  e  th^t  H 
may  some  day  develop  into  a  permanently  important  constitu- 
ent of  our  revenue  system. 

As  against  these  undoubted  accomplishments  are  to  be  set 
three  weaknesses.    The  first  is  the  failure  adequately  to  util  ze 

Sablv  o'n  crf''*"'^  '""'K''  '"■•^^'-  ""^  ^^d'ti""-'  «t«™P  taxes 
\uZiL  °V  r^'  ?"'■  '™^"  '■•^"^'Pt^'  ^  ^ell  as  taxes  on  quasi- 
luxuries.  For  the  latter  would  at  the  same  time  serve  to  pro- 
mote the  desirable  policy  of  restoring  the  favorable  Ukncebt 
L  th"e  'wTr  '''"'"'^*""  ^°'  ^""^^  consumption,  so  sorelyTe^dti 
The  second  weakness  is  the  failure  to  introduce  the  lone 

tT    No?  aTt/"  f^  -^^^-f -tive  provisions  of  the  incom! 
tax.    Wot  a   ittle,  it  is  true,  has  been  accompUshed-  but  the 

defeTo?  r^'  °  tlf' •'  ''''  ''^  '^  "°"  levied'acceftuates   he 
ttrl.     ?'•'*'"  '^'''"^  °™^^'°"«  «"d  commissions  which 

The  thtr''r"°?°"'  ™^"'"  '^'  P''^'^^*"g  >°^er  scale. 

I  he  thu-d  and  most  important  drawback  is  the  unfortunate 
principle  adopted  in  the  elaboration  of  the  excess-profits  tax 
It  IS  a  principle  which  wiU  return  to  plague  the  invento^ 
The  law  will  m  a  1  probability  be  found  to  be  almost  unwork^ 
able,  and  even  if  this  should  not  be  the  case,  its  t^Zi  al 


(• 


•S 

,/ 


708 


ESSAYS  IN  TAXATION 


success  will  be  purchased  at  the  cost  of  gross  inequality  and  of 
unfavorable  effects  on  the  true  elements  of  economic  prosperity 
Balancing  the  strong  against  the  weak  points  of  the  law  we 
naay  conclude  that  while  the  former  represent  lasting  advantages 
the  atter  are  susceptible  of  amelioration  by  comparatively 
simple  changes.  Taking  it  all  in  all,  therefore,  the  war  revenue 
act  is  to  be  welcomed  as  a  notable  achievement  which  wiU 
long  be  remembered  in  the  annals  of  democratic  progress. 


TABLE  I 

TAXES  ON   SPIRITS,   BEVERAGES   AND   TOBACCO 


Distilled  spirits 

For  beverages per  gal. ) 

*  or  non-beverages per  gal.  ) 

Imitation  sparkling  wine per  pint 

Rectified  (supplementary) per  gal. 

Grape  brandy per  gal. 

otill  wines 

14  per  cent  or  less  alcohol. .  .  .  per  gal. 

14-21  per  cent  alcohol per  gal. 

21-24  per  cent  alcohol per  gal. 

Over  24  per  cent  alcohol per  gal. 

Sparkling  wines per  i^  pint 

Artihcially  carbonated  waters.,  .per  }4  pint 

Liquors,  cordials  etc per  ^^  pint 

oirups  and  extracts 

Soft  drinks  and  mineral  waters.! per  gal. 
Cereal  beverages,  less  than  on  produc- 

K'%. alcohol  er's  price 

Grape  juice,  ginger  ale.  car-         on  produc- 
bonated  waters,  etc.  er's  price 

Natural  mineral  waters,  etc per  gal. 

Soft  drinks,  ice  cream,  etc for  each  10c 

r^    ,      .       . ,  retail  price 

Carbomc  acid  gas per  pound 

rermented  liquors per  barrel 

Tobacco  and  snuff per  pound 

Cigars 

Weighing  more  than  3  pounds 

per  1000 per  1000 

To  retail  for  less  than  4  cents 

-each.      per  1000 

lo  retail  for  not  more  than 

^Scents per  1000 

To  retail  for  4-7  cents per  1000 

To  retail  for  6-8  cents per  1000 

To  retail  for  8-15  cents per  1000 

To  retail  for  15-20  cents. .   per  1000 
To  retail  for  over  20  cents. .per  1000 
Weighing    not    more    than    3 

pounds  per  1000 per  1000 

Cigarettes 

Weighing  more  than  3  pounds 

per  thousand per  1000 

Weighing    not    more    than    3 

pounds  per  1000 per  1000 

Cigarette  paper per  100 

Cigarette  tubes per  100 


Old         Act  of      Act  of      Act  of 
rate  1914         1916         1917 


11.10 
.10 

.03 


1.00 
.08 


$1.10 
.10 

.55 


.08 

.03 

.015 

.015 


»i.io  \*l-^ 


.10 

.04 
.10 
.25 
1.10 
.03 
.015 
.015 


.15 
.20-30 

.08 
.20 
.50 
3.20 
.06 
.03 
.03 
.05-20 
.01 


1.50 
.08 


3.00         3.00 


1.50 
.08 


3.00 


.05 

3.00 

.13 


3.00 


4.00 


Act  of 
1918 

$6.40 
2.20 

.30 
.60 

.16 
.40 
1.00 
6.40 
.12 
.06 
.06 


15% 

10% 

.02 
.01 


6.00 
.18 


4.00 


mm* 

•  •    » 
■1    •    • 

•  •    ■ 

•  •   ■ 

6.00 

8.00 

10.00 

6.00 

9.00 

12.00 

15.00 

.75 

.75 

.75 

1.00 

1.50 

1.25 

1.15 

1.25 

2.05 

3.00 

3.60 

«   •   ■ 

■•  •  « 

3.60 

•  «  • 

3.60 

«  •  • 

4.80 
.01 
.02 

7.20 
.02 

THE  WAR  REVENUE  ACTS 


709 


TABLE  II 

EXCISES  AND   MISCELLANEOUS  TAXES  » 


Colored  oleomargarine  per  pound 
XSI  on-colored  oleomar- 


Old  rate 
10  cents 


Act  of 
1917 


Act  of 
1918 


1 1  A  cent 
10  cents 

l,/4  cent 

i  cent 

4  cents 
$300 

2  cents 
1/2  of  1  % 
10% 


3% 
3% 


1/4-1/2  cent 
3% 


3% 

5% 


Rate  in  force 

in  1921 
10  cents 

1/4  cent 
10  cents 
3/4  cent 

1  cent 
4  cents 

$300 

2  cents 
1/2  of  1  per  cent 
10% 

3% 


5% 


5%  5% 

5%  5% 

5%  rentals  5%  rentals 

5%  5% 


.  «*"°e.  .      per  pound 

Adulterated  butter per  pound 

gfjo^'ess  butter per  pound 

*M'ea  cheese per  pound 

Mixed  flour per  barrel 

^P""™ • per  pound 

phosphorus  matches.  .  .per  100 

Bank  circulation per  month 

State  bank  notes 

Automobile  trucks. . . . . 
Automobiles  and  motor^ 

cycles 

Tires,  parts,  accessoriesj 

etc 

Musical  instruments . .  " 
Moving  picture  films. . .  per  foot 

Jewelry 

Sporting  goods  and 

games 

Patent  medicines. .....'  ' '  *  '  * ' 

Perfumes,  etc 

Chewing  gum .'.'.' 

Cameras _  " ' ' 

Photographic  supplies. . 

Candy 

Firearms,  etc ...... . 

Hunting  knives,  etc. ." .' ." 

Daggers,  etc 

Electric  fans 

Thermos  bottles,  etc. . .' 

Cigar  holders,  etc 

Slot  machines 

Weighing  machines ..'. 

Liveries,  etc . . ,  * '  * 

Hunting  and  riding  gar- 
ments   

Articles  of  fur .' .' 

Pleasure  boats .*  * ' 

Toilet  soap ]  \'' 

Sculptures,  paintings! 

etc 

Carpets,  picture  in  excess  of 

frames,  trunks,  um-    prices  enumer- 

brellas.  fans,  wearing  ated  in  the  law 

apparel,  etc. 

Boats  and  yachts per  foot 

Admissions,  general per  10  cents 

Admissions  to  cabarets. per  10  cents 

Scalper's  tickets on  advance  *. '. ', 

_  of  price 

S"^;. •, over  $12 

Munitions  manufactur- 

®" on  net  profits  12  per  cent « 

ST^J^rT^E  ^^^  ^^^  ^^^  excises  or  taxes  on  facilities,  see  Table  IV, 
2  Act  of  1916. 
•Over  $10. 


3% 

10% 

10% 

2% 

4% 

?^ 

4% 

4% 

2% 

3% 

3% 

3% 

10% 

10% 

•  •  • 

5% 

5% 

«  ■  • 

5% 

10^ 

•  •  ■ 

10% 

•  •  ■ 

,10% 

10% 

•  •  • 

100% 

100% 

■  ■   • 

^^ 

5% 

.  •  . 

^^ 

5% 

•  •  • 

10% 

10% 

•  •  • 

5% 

5% 

•  •  • 

10% 

10% 

■  ■  • 

10% 

10% 

•    a    ■ 

10% 

10% 

■    >    ■ 

10% 

10% 

■    ■    • 

10% 

10% 

•    ■    ■ 

3% 

3% 

•   •    • 

10% 

10% 

•    •    • 

10% 

10% 

50c.-$2 

1  cent 

1  cent 

1  cent 

1  cent 

•  •  ■ 

1 1/2  cents 

i  11/2  cents 

10% 

.10%  » 

10%  « 

10% 

5% 

tl 

II 


710 


ESSAYS  IN  TAXATION 


THE  WAR  REVENUE  ACTS 


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TO 

s 

3 

a> 

S",  "iibr3CC  - 

_g.2  o  o  o  o  £  2 
0;  c  C.2  «  ■SI  t; 

08  O  S  3  O  O  2^ 


T3 

a      «  **  Jrt 

3   «   >>  08—3 
O 


0)   _ 

OT  ?:  e  «  mS 


0) 

oom 


*•<  n  s 

**  aT3  ■■  ■ 


712 


ESSAYS  IN  TAXATION 


THE  WAR  REVENUE  ACTS 


713 


TABLE  V 

mCOME  TAX  ON  INDIVIDUALS  IN  % 


TABLE  IV 

STAMP  TAXn 

(Hd      Act  of  Act  of    Act  of 

„     ,       ,         ,   .  rate       1914  1917      1918 

Bond  and  stock  lasues per  $100  ...           5c.  5c.        5c. 

Sales  of  stock per  $100  ...           2c.  2c.        2c. 

Sales  on  produce  exchanges per  $100  ...           Ic.  2c.        2c. 

Promissory  notes ...  ...           2c.  2c.         2c. 

Bills  of  lading   ...  ...           ic.  

Bonds  (except  legal) ...  ...         fiOc.  

Indemnity  and  surety  bonds ...  60o.       60c. 

Certificates  of  profit per  $100  ...           2c.  

Certificates  of  damage ...  ...         26c.  

Other  certificates ...  ...          IQc.  

Brokers' notes ...  ...         iQc.  

Conveyances per  $500  . . .         50c.  50c.      50c. 

Custom-house  entries ...  ...          25c.-$l  25c.-$l  25c.-$l 

Withdrawal  from  bonded  warehouse. .                ...  ...          ...  ...      50c. 

Powers  of  attorney ...  ...      10c.-25c.  25c.      25c. 

Protests ...  ...         25c. 

Cotton  futures per  pound  ...           2c.  »  JZc. »      2c. 

Proxies.  .  .    ...  lOc.      10c. 

Passage  tickets ...  ...        $1-5  $1-5     fi-5 

Playing  cards per  pack  2c.          ...  7c.  «       8c. 

Parcels -post  packages per  25c.  Ic.         Ic. 

Freight ...  3%  1      3%  7 

Express  packages per  20c.  Ic.  *       Ic.  ^ 

Passenger  fares ...  8%  »      8%  ^ 

Pullman  tickets ...  ...           Ic.  10%        8%  ^ 

Pipe-lme  transportation ...  5%  2      »%  7 

Telegraph    and    telephone    (over    15 

cents) ...  ...           Ic.  6c. » 

Insurance 

Fire,  marine  and  casualty per  $1  of  premium  .  . .         l/2c.  Ic.  •       Ic.  • 

Life per  $100  of  policy 8c.  •       8c.  • 

Property  insurance  issued  by  certain 

foreign  corporations per  $1  of  premium  ...          ...  ...         3o. 

Perfumery  and  cosmetics 

Price  5-25  cents per  package  . . .    1/8-5/8  c.  ^  o<y  «       act 

Over  25  cents per  package  . . .   5/8c.  per  25c. ;     ^'^         ^'° 

Chewing  gum per  $1.00  ...           4c.  2%         3% 

*  Imposed  by  the  Cotton  Futures  Act  of  Aug.  18,  1914. 
2  Not  called  stamp  taxes,  but  taxes  on  facilities,  etc. 

'  No  longer  called  stamp  taxes,  but  taxes  on  facilities,  etc. 

*  No  longer  called  stamp  taxes,  but  excise  taxes. 
'  No  change. 

« No  longer  called  stamp  taxes,  but  taxes  on  insurance. 
'  Called  tax  on  transportation  and  other  facilities. 


Act  of 
191S 


Act  of 
1916 


Act  of  1917 


Surtax 


Increments  of 

taxable  income 

$5,000-$6,000.  .  . 

6,000-7,500 

7,500-8,000 

8,000-10,000.  .  . 
10,000-12,000.  .  . 
12,000-12,500.  .  . 
12,500-14,000.  .  . 
14,000-15,000.  .  . 
15,000-16,000... 
16,000-18,000... 
18,000-20,000.  .  . 
20,000-22,000.  .  . 
22,000-24,000... 
24,000-26,000.  .  . 
26,000-28,000.  .  . 
28,000-30,000.  .  . 
30,000-32,000.  .  . 
32,000-34,000.  .  . 
34,000-36,000.  .  . 
36,000-38,000.  .  . 
38,000-40,000.  .  . 
40,000-42,000.  .  . 
42,000-44,000.  .  . 
44,000-46,000.  .. 
46,000-48,000.  .  . 
48,000-50.000.  .  . 

50,000-52,000 2 

52,000-54,000 2 

54,000-56,000 2 

56,000-58,000 2 

58,000-60,000 2 

60,000-62,000 2 

62,000-64,000 2 

64,000-66,000 2 

66,000-68,000 2 

68,000-70,000 2 

70,000-72.000 2 

72,000-74,000 2 

74,000-75,000 2 

75,000-76.000 3 

76,000-78,000 3 

78,000-80,000 3 

80,000-82,000 3 

82.000-84,000 3 

84,000-86.000 3 

86.000-88.000 3 

88.000-90.000 3 

90.000-92.000 3 

92,000-94,000 3 

.    94,000-96.000 3 

96.000-98,000 3 

98,000-100,000 3 

100,000-150,000 4 

150.000-200,000 4 

200,000-250,000 4 

250,000-300,000 5 

300.000-500,000 5 

500,000-750,000 6 

750,000-1,000,000 6 

1,000,000-1,500,000 6 

1,500,000-2,000,000 6 

Over  2,000,000 6 


Total 
rate 


Surtax 


2 
2 
2 
2 
2 
2 
2 
2 
2 
2 
2 
2 
2 
2 
2 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
5 
5 
5 
6 
6 
7 
7 
7 
7 
7 


1 
1 
1 
1 
1 
1 
1 
1 
1 
1 
2 
2 
2 
2 
2 
2 
2 
2 
2 
2 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
3 
4 
4 
4 
4 
4 
4 
4 
4 
4 
4 
5 
6 
7 
8 
9 
10 
10 
11 
12 
13 


Total 
rate 

2 

2 

2 

2 

2 

2 

2 

2 

2 

2 

2 

3 

3 

3 

3 

3 

3 

3 

3 

3 

3 

4 

4 

4 

4 

4 

4 

4 

4 

4 

4 

5 

5 

5 

5 

5 

5 

5 

5 

5 

5 

5 

6 

6 

6 

6 

6 

6 

6 

6 

6 

6 

7 

8 

9 
10 
11 
12 
12 
13 
14 
15 


Addi- 
tional 
surtax 

1 

1 

2 

2 

3 

3 

4 

4 

5 

5 

5 

7 

7 

7 

7 

7 

7 

7 

7 

7 

7 

10 
10 
10 
10 
10 
10 
10 
10 
10 
10 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
14 
18 
18 
18 
18 
18 
18 
18 
18 
18 
18 
22 
25 
30 
34 
37 
40 
45 
50 
50 
50 


Act  of 
1918^ 


Total 

surtax 

1 

1 

2 

2 

3 

3 

4 

4 

5 

5 

5 

8 

8 

8 

8 

8 

8 

8 

8 

8 

8 

12 

12 

12 

12 

12 

12 

12 

12 

12 

12 

17 

17 

17 

17 

17 

17 

17 

17 

17 

17 

17 

22 

22 

22 

22 

22 

22 

22 

22 

22 

22 

27 

31 

37 

42 

46 

50 

55 

61 

62 

63 


Total 
rate 
5 
5 
6 
6 
7 
7 
8 
8 
9 
9 
9 
12 
12 
12 
12 
12 
12 
12 
12 
12 
12 
16 
16 
16 
16 
16 
16 
16 
16 
16 
16 
21 
21 
21 
21 
21 
21 
21 
21 
21 
21 
21 
26 
26 
26 
26 
26 
26 
26 
26 
26 
26 
31 
35 
41 
46 
50 
54 
59 
65 
66 
67 


Surtax 

1 

2 

2 

3 

4 

5 

5 

6 

7 

7 

8 

9 
10 
11 
12 
13 
14 
15 
16 
17 
18 
19 
20 
21 
22 
23 
24 
25 
26 
27 
28 
29 
30 
31 
32 
33 
34 
35 
36 
36 
37 
38 
39 
40 
41 
42 
43 
44 
45 
46 
47 
48 
52 
56 
60 
60 
63 
64 
64 
65 
65 
65 


Total 
rate 
13 
14 
14 
15 
16 
17 
17 
18 
19 
19 
20 
21 
22 
23 
24 
25 
26 
27 
28 
29 
30 
31 
32 
33 
34 
35 
36 
37 
38 
39 
40 
41 
42 
43 
44 
45 
46 
47 
48 
48 
49 
50 
51 
52 
53 
54 
55 
56 
57 
58 
59 
60 
64 
68 
72 
72 
75 
76 
76 
77 
77 
77 


In 

force 

1919- 

1921 

Total 
rate 
9 
10 
10 
11 
12 
13 
13 
14 
15 
15 
16 
17 
18 
19 
20 
21 
22 
23 
24 
25 
26 
27 
28 
29 
30 
31 
32 
33 
34 
35 
36 
37 
38 
39 
40 
41 
42 
32 
44 
44 
45 
46 
47 
48 
49 
50 
51 
52 
53 
54 
55 
56 
60 
64 
68 
68 
71 
72 
72 
73 
73 
73 


»  The  Act  of  1918  fixes  the  normal  rate  at  12%,  except  on  the  first  $4,000, 
when  it  is  6%.  For  1919  and  thereafter  the  rates  are  8%  and  4%  re- 
spectively. 


714 


ESSAYS  IN  TAXATION 


TABLE   VI— BBTATE   TAX 


Net  estate 


Au  of 
1916 


Below  $50.000 i 

50.000-150,000 ■   2 

I5o.(x:y-2o0,ooo ■"  3 

2o0.0(X>-4o0,CKX) ""   4 

450.(XK>-l,CMJO.00O ■'  5 

450.(K)(>-750,()00 '" 

750.000-1. (XXI.OOO .' .'  ■ .' .'  *  ■ 

1-llii-  millions \\\ 

\\i-2  milliona ] '  * 

1-2  millions 6 


2-3 

3-4 

4-5 

Over  5 

5-8 
8-10 
Over  10 


.  7 
.  8 
9 
10 
10 
10 
10 


Aa  of 

Mar.  S, 
1917 

m 

3 

6 

7H 


9 

lOH 
12 

I3J4 

15 

15 

15 

15 


Act  of  Oct.  S,  1917 

Addi- 

Total 

tional 

rate 

^i 

2 

1 

4 

IM 

6 

2 

8 

2H 

•  •  •  • 

•  •   •  • 

10 

•  • 

•  • 

•  •  •  • 

•  ■   •  • 

3 

•  • 
■  * 

18 

3^ 

14 

4 

16 

4>^ 

18 

5 

7 


20 
22 
25 


TABLE   VII — INTERNAL   REVENUE   RECEIPTS 


Total 413,522 

Income  and  profits  tax 

Excess  profits 

Income  tax 7'.), 2.56 

Corporations 3s!320 

Individuals 40.936 

Munition  mfrs 

Miscellaneous '  ' 

Distilled  spirits. .  .  .  144,620 
Fermented  liquors .    79,329 
Nonalcoholic     bev- 
erages  

Tobacco 79,764 

Stamps 20,494 

Sales  by  P.  M .., 

Bonds,  conveyances, 

etc , 

Capital  stock  trans- 
fers   

Produce  exchanges .     ...','. 

Playing  carda 

Special  taxes 4,967 

Capital  stock 

Admissions  &  Dues .  .     ..... 

Estates 

Public  utilitiea [ .[[ 

Freight [ 

Express " ' 

Passenger ',[[',[ 

Pullman 

Oil  by  pipe '      ' 

Telegraph  4  Tele 

Insurance 

Excises,  Mfrs .  .  .  .  . 

Autos [ 

Pianoa . . . . . 

Candv "  " ' ' 

Articles  of  fur 

Movies 

Firearms [[ 

Excises.  Dealers ..." 

Jewelry " 

Carpets,  apparel. 

etc 

Perfumes,  etc ,[[ 

*  For  the  calendar  year. 


1916 
512,723 


124.938 
56.994 
67,944 


158.682 
88,771 


1917 
809,394 

" "  37 

359.648 

179..=i73 

173.387 

27,663 


476.119 
91,897 


lOlS 
3,698.951] 

2.8;i9.n2s 

1, 6.38.747  • 
1,195.190' 
.503.»)98i 
691.492' 
13.797 
859.928 
443.840 
125.728 


1919  1920 

3,850,150  5.407.580 
2.6(K).763  3,9.i6,9.'^6 
1.320,(KX)^2..5(K).000« 
l,231.()0t)i2.0(K).0(X)» 

r).i3.7()0i    

1,127.720'    


Act  of 
1918 

.1 
2 

3 

4 

•  • 

6 

8 
10 
12 

ii 

16 
18 

26 
22 
25 


4.595,007 
3,225.791 
1.250,0002 
1,975,0002 


88,064 
38.110 


103.202 
8.254 


156,189 
17.538 


1.249.387 
483.051 
117,504 

7,172 

20(i.(K)3 

33,552 


6.908 


16.709 
10.471 

'6,076 


1,4.50,644 
67.271 
41,744 

57.461 

294.777 

84,;i48 

24.438 


1,369,210 

78,471 

17 

58,673 

2.53,990 

72,468 

20.881 


12,949    18,747   .35,277   32,671 


2.236 
2.3M 
1,2763 
56,304 
24.99(> 
28.616 
47.412 
70.737 
30.U02 
6,451 
24„306 
2,236 
1.433 
6,299 
6,492 
39.069 
23.981 
2,422 


7,541 

7.264 

2.092» 

89,183 

28.776 

54.851 

82.029 

237.840 

116.:i45 

14.;i01 

77.791 


13,372 

8.173 

3,088 

105.480 

93.020 

81,929 

103,636 

2S9.:i48 

130.785 

17,597 

98,786 


8,791 

7,522 

2,604 

92.446 

81,514 

95.883 

154.040 

301.512 

140.019 

17,094 

97,482 


5.f>02 
17.879 
14.509 
82.425 
48.834 

4,773 


ww3 


4.833 

6.i47 
1.794 

395 
1,500 


8,426 
26.631 
18.422 
21)7.883* 
143,923 
13.624 
23,142 
16,311 
4.381 
4.646 
61,738* 
26.864 

17,903 
6,427 


8,485 

27,360 

18,992 

229.322< 

115,540 

11,568 

20.437 

9.081 

6,008 

3,702 

i 

24,304 

20,375 
6,801 


'Included  under  tlie  excise  taxes.  manufa«t..r«r«  ^®*"  '*'*^'^' 


,  ,  ,         taxes,  manufacturers. 

*  Includes  all  excises. 

*  Included  in  excises,  manufacturers. 


CHAPTER  XXIII 

LOANS  VERSUS  TAXES  IN  WAR  FINANCE  * 

The  fiscal  problems  of  the  war  may  be  divided  into  those  of  a 
general  and  of  a  specific  character.    War  expenditures  can  be 

'  This  chapter  is  reprinted  with  a  few  changes  from  the  paper  published 
in  the  volume  entitled  "Financing  the  War,"  Annals  of  the  American 
Academy  of  Political  and  Social  Science,  volume  Ixxv.,  January,  1918,  pp. 
52-82.  In  the  same  volume  will  be  found  two  articles  which  take  a  differ- 
ent view:0.  M.  W.  Sprague,  "Relationship  between  Loans  and  Taxes  in 
War  Finance,"  pp.  83-89,  and  R.  G.  Blakey,  "Shifting  the  War  Burden 
upon  the  Future,"  pp.  90-104.  The  fundamental  ideas  of  the  pre.sent 
writer  will  also  be  found  in  "How  to  Finance  the  War,"  Columbia  War 
Papers,  no.  7,  1917,  and  in  "Our  Fiscal  Policy,"  in  Financial  Mobilization 
for  War,  Papers  presented  at  a  Joint  Conference  of  the  Western  Economic 
Society  and  the  City  Club  of  Chicago,  June  2l8t  and  22d,  1917.  In  the  same 
volume  will  be  found  the  paper  by  E.  Dana  Durand,  "Taxation  vs.  Bond 
Issues  for  Financing  the  War,"  which  takes  the  oppo.site  standpoint.  The 
discussion  was  continued  by  F.  F.  Anderson,  in  "Fundamental  Factors  of 
War  Finance,"  Journal  of  Political  Economy,  vol.  xxv.  (1917),  p.  857;  H.  J. 
Davenport,  "The  War  Tax  Paradox"  in  Arnerican  Economic  Review, 
vol.  ix.  (1919),  p.  34;  and  Jacob  Viner,  "Who  Paid  for  the  War"  in  Journal 
of  Political  Economy,  vol.  xxviii.  (1920),  p.  46.  Cf.  C.  L.  Bogart,  War  Costs 
anl  Their  Financing,  New  York,  1921,  esp.  ch.  x. 

In  Great  Britain  we  may  refer  to  F.  Y.  Edgeworth,  Currency  and  Fi- 
nance in  TitneofWar,  Oxford,  1917;  W.  R.  Scott,  The  Adjustment  of  War 
Expenditure  between  Taxes  and  Loans,  Glasgow,  1917;  the  chapter  entitled 
"The  Financial  Burdens  of  To-day  and  of  To-morrow"  in  Economic 
Problems  of  Peace  after  War,  Second  Series,  Cambridge,  1918;  and  "Some 
Aspects  of  the  Proposed  Capital  Levy"  in  the  Economic  Journal,  vol. 
xxviii.  (1918),  esp.  pp.  250-258.  Both  of  these  writers  agree  with  the 
view  presented  in  the  text.  Professor  Pigou  is  responsible  for  "The 
Economics  of  the  War  Loan,'  in  the  Economic  Journal,  vol.  xxvii.  (1917), 
p.  16,  and  for  several  chapters  on  the  subject  in  his  Economics  of  Welfare, 
1920,  pp.  043-664.    His  views  are  discussed  infra,  p.  730. 

The  Itahans  have  devoted  considerable  attention  to  the  subject.  Cf. 
A.  de  Viti  de  Marco,  Contributo  alia  teoria  del  prestito  pubblico  in  Saggi  di 
economia  e  finanza,  Rome,  1889;  M.  Pantaleone;  "  Imposta  e  debito  in  ri- 
guardo  alia  loro  pressione  "  in  Giornale  degli  Ecmwmisti,  July,  1891,  and  re- 
produced in  Scritti  vari  di  Economia,  vol.  iii.,  Roma,  1910;  M.  Marsilj- 
Libelli,  Pressione  comjxirata  del  prestito  pubblico  e  deWimposte  sulle  economie 
private  in  Atti  dei  Georgofilil,  Florence,  1910;  and  Benvenuto  Griziotti,  La 
diversa  pressione  tribuJtxiria  del  prestito  e  deWimposta,  in  Giornale  degli 
Economisti,  May,  1917,  and  separately,  Rome,  1917. 

715 


n 


/ 


716 


ESSAYS  IN  TAXATION 


\% 


met  m  three  ways:  by  taxes,  by  loans,  or  by  paper  money. 
The  specific  problems  have  to  deal  with  the  nature  and  the  de- 
tails of  each  of  these  expedients;  the  general  problem  is  concerned 
with  the  principles  that  underlie  the  preference  among  the 
respective  methods.  Inasmuch  as  paper  money  is  by  common 
consent  to  be  regarded  as  the  last  resort,  the  general  problem 
at  issue  here  pertains  to  the  choice  between  loans  and  taxes  and 
the  relative  proportions  in  which  each  is  to  be  employed. 

If  we  look  at  the  facts,  we  observe  a  marked  change  in  modem 
warfare.  In  former  times,  whether  in  classic  antiquity  or  in 
the  Middle  Ages,  the  expenses  of  war  were  defrayed  in  large 
measure  out  of  accumulated  funds  or  treasures  reenforced  by 
taxes,  and  were  reimbursed  to  the  victor  by  the  booty  of  war 
and  the  indemnities  imposed  upon  the  vanquished.  Since  the 
development  of  public  credit,  especially  since  the  middle  of  the 
eighteenth  century,  loans  have  taken  the  place  of  the  accumu- 
lated treasure  and  taxes  have  been  utiUzed  chiefly  for  the  purpose 
of  raismg  the  interest  on  the  war  loans  and  of  furnishing  in  addi- 
tion a  more  or  less  considerable  amortization  quota. 

The  facts  of  the  present  war  are  no  different.    During  the 
early  years  of  the  war  Great  Britain  raised  by  taxation  slightlv 
over  seventeen  per  cent  of  her  war  expenses:  Italy,  although  also 
evying  heavy  taxes,  raised  a  still  larger  proportion  than  Eng- 
land by  loans;  in  Germany  only  an  insignificant  fraction  of  the 
war  expenses  was  met  by  taxes;  in  France,  as  a  result  partly  of 
the  occupation  of  its  territory  by  the  enemy,  the  taxes  levied 
dunng  the  war  did  not  suflSce  even  to  pay  the  ordinary  peace 
expenses;  while  Russia  was  in  a  still  worse  position.    Although 
there  is  indeed  a  notable  difference  between  the  zero  of  France 
aiid  the  seventeen  per  cent  of  Great  Britain,  the  fact  remains 
that  in  all  the  countries,  without  exception,  the  overwhelming 
proportion  of  war  expenditures  was  met  through  loans     The 
same  is  true  of  the  United  States.^ 

Early  in  the  war,  however,  an  American  economist  2  made 
the  following  statement:  "I  am  strongly  of  the  opinion  that  a 
great  modem  war,  enormously  costly  as  it  is,  can  and  should 
be  mainly,  if  not  entirely,  financed  from  the  proceeds  of  taxes 
coUected  dunng  its  progress."  Similar  opinions  were  voiced 
by  others  and  found  expression  in  Congressional  speeches,  and 

*  See  the  facts  infra,  pp.  772  et  seq. 

'O.  M^  W   Sprague,  "The  Conscription  of  Income,"  in  the  Econmnic 
Journal,  March,  1917,  p.  2. 


WANS  vs.   TAXES  IN  WAR  FINANCE  717 

a  more  or  less  faint  echo  of  that  pronouncement  was  even 
audible  m  certain  statements  emanating  from  the  executive 
branch  of  our  government. 

Why  have  the  actual  methods  diverged  so  greatly  from  these 
suggestions?  How  does  it  happen  that  the  statesmen  and  the 
legislators  m  every  belligerent  country,  including  our  own 
have  done  the  opposite?  Shall  we  con>^ict  the  European  and 
American  statesmen  of  folly  and  fiscal  madness?  Or  is  it  per- 
haps true  that  the  suggestions,  so  unavailingly  made  to  the 
contrary,  have  been  based  upon  an  inadequate  analysis? 

This  IS  the  problem  to  which  we  shall  now  address  ourselves. 

I.  What  are  War  Costs? 

The  first  point  in  our  analysis  is  to  ascertain  what  is  meant  by 
the  costs  of  war.    It  is  obvious  that  a  distinction  must  be  made 
between  the  money  costs  and  the  real  costs  of  a  war.     The 
money  costs  of  a  war  are  the  actual  outlays  of  the  government 
for  war  purposes,  that  is,  the  surplus  above  the  general  ex- 
penditures m  time  of  peace,  making  due  allowance  for  changes 
m  the  purchasmg  power  of  money.    The  real  costs  of  a  war,  on 
the  other  hand,  are  to  be  calculated  very  differently     When 
the  ordinary  man  speaks  of  wealth  he  thinks  of  accumulated 
capital.    The  more  sagacious  thinker,  however,  is  aware  that 
the  real  wealth  of  a  community  consists  in  larger  part  of  the 
results  of  current  production.    Accumulated  capital  is  of  im- 
portance chiefly  as  an  aid  to  current  production.    It  has  been 
calculated  that  the  Worid  is  always  within  a  year  and  a  half  of 
starvation.     If  current    production    were   suddenly  to  cease 
the  worid's  stores  of  food  and  other  products  would  barely 
suflSce  for  eighteen  months.    A  wealthy  country  is  one  where  the 
consumption  of  the  people  is  great  and  variegated  and  where 
the  current  production  is  so  large  that  there  will  still  be  a  sub- 
stantial surplus  susceptible  of  being  converted  into  capital 
for  future  production  and  into  an  environment  which  will  spell 
increasing  welfare  and   civilization.     A  great  war  interferes 
rudely  with  the  results    both  of  past    accumulation  and  of 
current  production.    The  real  costs  of  a  war  are  to  be  measured 
by  the  diminution  of  the  social  patrimony  and  by  the  diversion 
of  current   social   output   from   productive   to   unproductive 
channels,  i.  e.,  by  changes  both  in  the  fund  of  accumulated 
wealth  and  in  the  flow  of  social  income. 


718 


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In  drawing  up  the  balance  sheet  we  should  have  to  put  on  the 
one  side  the  diminution  of  the  fund  of  wealth  as  represented  by 
(a)  the  destruction  of  private  property,  (b)  the  loss  of  govern- 
ment accumulations,  (c)  the  impairment  of  natural  resources 
and  (d)  the  decrease  in  the  social  output  due  to  the  reduction 
of  the  labor  force  by  miHtary  service  and  the  fortunes  of  war 
On  the  other  side  of  the  ledger,  indeed,  we  should  have  to  put 
such  capital  items  as  (a)  indemnities  or  booty,  and  (b)  the 
acquisition  of  new  territory;  and  on  the  income  side,  the  results 
of  (c)  speeding  up  of  production,    (d)    the    more  favorable 
economic  situation  attained  by  the  poUtical  results  of  the  war 
and  (e)  changes  in  the  methods  of  industry  and  the  relation 
of  capital  and  labor  which  may  conduce  to  greater  efficiency 
and  increased  output. 

Although  not  all  of  these  items  are  susceptible  of  being  put  in 
terms  of  dollars  and  cents,  the  real  costs  of  a  war  may  be  charac- 
terized as  the  balance  of  the  debit  side  over  the  credit  side  in  the 
above  account. 

While  this  contrast  ])etween  the  money  cost  and  the  real 
cost  of  the  war  is  important,  it  does  not  yet^^go  to  the  root  of  the 
matter.  In  order  to  grasp  what  is  meant  bv  the  real  costs  of  a 
war,  we  must  revert  to  the  distinction  familiar  to  the  student, 
but  so  often  neglected  in  popular  discussion,  between  objective 
and  subjective  costs. 

By_obJ££liyfi_costs  are  meant  the  costs  incorporated  in  the 
goo<ls,  commodities  and  services  that  are  used  for  the  war, 
tEafls,  the  money  value  of  all  materials  consumed  and  all 
services  furnished  for  war  purposes.    These  costs  have  grown 
immensely  in  recent  times:  not  only  are  the  munitions  of  war 
infinitely  more  costly  than  in  former  times,  but  also  less  durable. 
The  bigger  the  gun,  the  shorter  is  its  life;  the  more  elaborate 
the  aeroplane,  the  greater  the  chance  of  its  destruction;  the 
better  the  sanitary  methods,  the  more  frequent  is  the  casting 
aside  of  imifoims;  the  more  complete  the  apphcation  of  science, 
the  more  rapid  are  the  ravages  of  war  by  both  land  and  sea! 
Not  only  are  initial  expenses  immensely  greater,  but  the  sheer 
waste  by  destruction  grows  with  every  forward  step  in  efficiency. 
The  objective  costs  of  war  are  so  pro^ligious  that  they  are 
obvious  to  all. 

In  contradistmction  to  the  objective  costs,  however,  are  the 
^ii5Hi^y?3^-^*^-    ^^^  essential  idea  here  is  that  QLjaacrificg^ 
The  production  of  everything  costs  some  sacrifice  and  all 


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LOANS  vs.   TAXES  IN  WAR  FINANCE 


719 


sacrifice  involves  pain,  either  the  pain  of  doing  something  dis- 
tasteful or  of  refraining  from  doing  something  pleasurable, 
bacriface  in  other  words  is  involved  both  in  labor  and  in  ab- 
stinence.    The  surplus  of  results  over  subjective  costs  con- 
stitutes the  welfare  or  the  real  wealth,  both  material  and  im- 
material, of  society.    In  a  community  based  upon  slavery  or 
where  the  laborers,  with  an  abject  standard  of  Ufe,  are  com- 
pelled to  work  sixteen  hours  a  day,  there  may  be  a  great  surplus 
of  production  and  in  that  sense  great  wealth.     If,  however 
slavery  is  a])olishod  or  the  laborers  acquire  a  shorter  working 
day  and  a  higher  standard  of  life,  not  only  may  there  be  the 
same  output  of  material  things  as  before,  but  there  will  be  a 
greater  surplus  over  subjective  costs,  and,  as  a  consequence 
an  increased  communal  welfare  and  a  higher  stage  of  civilization! 
As  a  result  of  the  machinery  of  our  social  order  subjective 
costs  are  commonly  translated  into  objective  and  money  costs 
If  a  machine  is  invented  which  cuts  in  half  the  period  needed 
for  the  production  of  a  particular  commodity,  we  speak  of 
halvmg  its  cost.    Instead  of  two  men  being  required  to  accom- 
plish the  result,  only  one  man  is  now  needed.    So  far  as  the 
community  is  concerned,  the  subjective  cost  or  sacrifice  is  re- 
duced; and  under  a  state  of  competition,  this  decrease  in  sub- 
jective costs  will  reflect  itself  in  smaller  objective  costs  and 
lower  prices.    So,  in  the  same  way,  just  as  the  greater  efficiency 
of  the  laborer  will  result  in  a  larger  output  of  material  com- 
modities,  the  greater  abstinence  involved   in   the   ordinary 
economy  practiced  by  the  members  of  a  community  will  be 
followed  b3^  an  increased  acciunulation  of  productive  capital. 
The  subjective  costs  involved  in  economy  are  undoubted,  but 
the  additional  results  which  ensue  from  the  practice  of  economy 
are  so  much  greater  that  there  remains  a  substantial  surplus. 
In  other  words,  net  sacrifice  or  burden  is  diminished. 

The  real  wealth  of  a  community  depends  upon  net  sacrifices  or 
subjective  costs.  Where  the  same  output  is  attended  with  less 
sacrifices  we  have  prosperity.  Where  increased  sacrifices  result 
in  still  greater  output  we  again  have  the  prosperity  that  goes 
with  lessened  net  subjective  costs.  When,  however,  economy 
changes  into  privation,  the  increased  material  results  may  be 
too.  dearly  purchased:  although  there  may  be  more  material 
wealth  for  the  present,  there  is  less  real  wealth  or  welfare  be- 
cause there  is  more  net  sacrifice.  So,  in  the  same  way,  when  in- 
crease of  production  is  attended  with  the  sapping  of  the  vitaUty 


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lin  /r^'  the  nominal   efficiency  really  becomes  in- 

efficiency and  the  greater  material  wealth  of  the  present  signifies 
less  real  wealth  or  welfare.  The  total  net  burdens  upon  the 
community  are  greater. 

The  important  criterion  in  the  economic  welfare  of  a  com- 
munity IS  therefore  the  subjective  cost  or  sacrifice.  This  is  as 
true  m  war  as  m  time  of  peace.  Just  as  the  subjective  cost  of  an 
individual  consists  of  the  effort  involved  in  labor  and  the  absti- 
nence involved  m  the  foregoing  of  enjoyments,  so  the  sub- 
jective  costs  of  a  community  due  to  a  war  consist  of  the 
burdens  of  additional  labor  which  it  must  expend  and  the  dt 

"^Z'^n  Tr^r^^^^  ""^  ^^'  ^^  ^^^^^^«  ^hich  it  must 
torego.  The  objective  costs  of  a  war  are  material  commodities 
and  services;  the  subjective  costs  of  a  war  constitute  the  real 
burdens  re^tmg  on  the  community.    The  true  costs  of  a  war 

th^  rl"v  "^7  '^'  ""'  subjective  burdens  which  result  from 
the  transition  from  a  peace  economy  to  a  war  economy,  and 
which  are  connected  with  the  fundamental  processes  of  pro- 
duction and  consumption  They  consist,  on  the  one  hand,  of  all 
the  efforts  involved  m  the  transfer  of  enterprise  and  invest- 
ments from  the  ordmaiy  channels  of  production  to  the  new  fields 

hLTT^llT''^'''.'  ^"  *^"  ^^'-  ^^^y  ^«^«i«t,  on  the  other 
hand,  of  all  those  efforts  involved  in  the  reduction  and  the 

tn^!,  1  consumption  which  will  serve  to  counterbalance,  in 
part  at  least,  the  mevitable  reduction  of  social  output  The 
net^result  nieasured  in  temis  of  aggregate  sacrifice  or  subjective 
cost  constitutes  the  real  burden  of  a  war.    The  problem  thit 

Z  Tk  "'  I'  ^'^  ^""^^'^  *^^  '^''^^'  ^^  ^^"«"«  fiscal  expedients 
upon  these  changes  m  production  and  consumption  from  the 

on  socfetr""         "  "'''''''''"'  ''''''  "'  '^'  ^^  ^^^^^"«  '^^^^ 


II.  Can  War  Costs  be  Diminished  in  the  Present  or  be  Shared 

with  the  Fviuref 

After  this  preliminary  explanation  we  may  proceed  to  con 
sider  how  the  costs  of  a  war  can  be  diminish'LlTn  the  L  ent 
and  in  what  way,  if  any,  they  can  be  shared  with  the  future 

thPv  hir  t^^!^^  ''''*'  ^'^  concerned,  it  is  manifest  that 
they  belong  for  the  most  part,  to  the  present.  The  ser^dces 
must  be  performed  by  men  now  living  and  the  commo^t  es 
consumed  m  the  war  must  be  produced  before  they  Trrcon- 


LOANS  vs.   TAXES  IN  WAR  FINANCE  721 

sumed.  In  several  respects,  however,  the  present  may  benefit 
at  the  expense  of  the  future,  even  so  far  as  objective  costs  are 
concerned  These  considerations  deal  respectively  with  capital 
and  with  labor. 

In  the  cost  of  production  we  ordinarily  include  sums  set  aside 
for  depreciation  of  plant.     It  is  possible,   however,    that   the 
exigencies  of  the  war  situation  may  require  such  an  immediate 
increase  of  output  as  to  divert  to  current  production  the  funds 
which  would  otherwise  be  devoted  to  the  maintenance  of  plant 
The  result  is  that  the  future  will  possess  a  less  effective  plant 
than  would  otherwise  be  the  case.     Or,  in  the  second  place, 
the  capital  diverted  to  purposes  of  war  production  may  become 
useless  after  the  return  of  peace.     Thousands  of  munition 
plants,  for  instance,  may  have  been  constructed  solely  for  war 
purposes  with  machinery  that  it  would  be  difficult  or  even 
hopeless  to  convert  to  other  purposes.    The  capital  which  would 
otherwise  be  available  at  the  conclusion  of  the  war  for  peace 
production  will  to  this  extent  have  been  lost.    The  production 
m  the  future  will  be  less  than  would  otherwise  have  been  the 
case. 

What  is  true,  however,  of  capital,  is  equaUy  true  of  labor. 
It  IS  possible  that  the  speeding  up  of  production  involves  such  a 
stmm  on  the  laborers,  resulting  from  long  hours,  night  work 
and  unremitting  toil,  as  to  impair  their  health  and  transmit 
to  the  future  a  body  of  workmen  less  efficient  than  they  would 
otherwise  have  been.  It  may  take  some  time,  either  by  the 
more  careful  handling  of  the  then  existing  workmen,  or  by  the 
immigration  of  men  of  a  higher  standard  and  stronger  physique 
before  the  balance  is  restored.  And,  on  the  other  hand,  while 
a  diminished  consumption  is  assuredly  desirable  during  a  war 
the  enforced  decrease  of  consumption  which  may  result  from 
the  fortunes  of  war  may  bring  about  such  privation  in  the 
mass  of  the  community  as  to  sap  their  energies  and  reduce  their 
future  efficiency. 

In  aU  of  these  ways,  the  burden  of  the  present  may  be  Ught- 
ened  at  the  expense  of  the  future.  There  is  more  production, 
that  IS,  more  commodities  and  services  now;  but  there  will  be 
relatively  less  in  the  future.  Even  in  the  case  of  objective  costs 
the  present  may  benefit  at  the  expense  of  the  future. 

Subject  to  these  limitations  and   exceptions,   however,   it 
may  be  said  that  the  objective  costs  of  a  war  are,  in  the  main 
borne  by  the  present.    This  is  true  irrespective  of  whether  the 


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ESSAYS  IN  TAXATION 


expenditures  designed  to  furnish  these  commodities  and  services 
are  met  l.y  loans  or  by  taxes. 

is  wll^nr  ''^f  ^*^«"bjective  costs,  however,  the  situation 
Z^t^^^'^^'u--  ^"^J«««'^e  ««sts  may  be  reduced  without  anv 
of  the  burden  bemg  shAed  to  the  future;  or  they  may  be  dimiii'- 
ished  while  a  part  of  the  burden  is  borne  by  the  future.    It  is 
obvious  that  neither  of  these  results  can  be  obtained  by  the 
process  of  taxation     The  tax  imposed  upon  the  present  gen- 
eration may  indeed  have  some  repercussion  upon  the  future 
It  an  excessive  tax  is  imposed  upon  capital,  it  may  so  reduce 
existing  resources  as  to  make  future  production  smaller.    Even 
It  the  tax  IS  not  excessive,  the  taxpayer,  instead  of  decreasing 
consumpt,ion  or  paying  the  tax  out  of  current  income,  may 
draw  on  the  funds  which  he  would  otherwise  have  devoted  to 
productive  purposes.    Or,  finally,  if  an  excessive  tax  is  imposed 
upon  mcomes  or  profits,  it  may  so  diminish  the  tendency  to 
enterprise  that  the  baneful  consequences  will  endure.    In  aU 
these  cases  however,  although  the  future  undoubtedly  suffera 
there  is  no  duninution  in  the  burdens  that  rest  upon  the  present. 
Ihe  present  taxpayers  bear  the  burden,  even  though  the  future 
taxpayers  also  bear  a  burden.  . 

thl'l^l  Tk  *T.'"  ^^^,  T^  "^  '°»"''^  Can  the  burden  upon 
the  present,  be  bghtened  by  the  issue  of  government  loans? 
Are  the  subjective  costs  or  sacrifices  of  the  community  in  any 
way  lessened  by  government  borrowing?  This  brings  up  for 
consideration  the  theory  of  public  credit. 
The  theory  of  credit,  as  it  has  been  worked  out  by  economists 

"^hth       V^^^^- ,  ^'■^'*  '"  ^  phenomenon  or  transaction  in 
which  a  part  takes  place  m  the  present  and  a  part  in  the  future 

;  r" .  *  """^  ™''"*'^'  ^  *"">  ""'"'  to  him  now  a  certain  sum 
^t  ix^'^ir*''  \"^\ '"  *^''  ^"*"''*'  the  equivalent  of  that 
U^„  7^""  Ju^  "i?  ^'^  •''*"  P*'*^'  *he  transaction  is  complete. 
If  we  deal  with  public,  instead  of  with  private,  credit,  the  situa- 
t  on  IS  identical.  The  funds  are  turned  over  now  by  certain 
classes  in  the  community  who  loan  the  money  to  the  govern- 
ment and  the  tmnsaction  is  concluded  in  the  future,  when  the 
ta were  furnish  the  money  to  return  it  to  the  bondholders 

How  does  It  happen  then  that  the  utiUzation  of  credit  dimin- 
ishes the  burden  upon  the  present?  How  can  the  subjective 
costs  of  the  war  be  lessened  for  the  communityl' 

In  the  case  of  private  credit  the  subjective  sacrifice  of  the 
individual  is  clearly  diminished.     This  is  obviously  tnie  of 


« 


LOANS  vs.   TAXES  IN  WAR  FINANCE 


723 


productive  credit,  for  otherwise  credit  would  not  have  become 
so  vital  a  fact  in  our  modern  industrial  life.  The  reason  why 
the  business  man  borrows  to-day  is  chiefly  because  he  thinks 
that  with  the  borrowed  funds  he  can  secure  such  a  return  as 
to  msure  an  enhanced  profit  even  after  paying  all  interest  as 
well  as  repaying  the  capital  borrowed.  The  credit,  therefore, 
m  so  far  as  it  enables  him  to  purchase  more  goods  with  the 
same  outlay,  or— what  is  the  same  thing— the  same  amount  of 
goods  with  a  smaller  outlay,  lessens  his  subjective  cost.  More- 
over, not  only  is  his  subjective  cost  or  sacrifice  less,  but  his 
objective  cost  or  outlay  as  compared  with  the  return,  is  also 
smaller. 

Even,  however,  if  we  deal  only  with  consumption  credit, 
that  is,  with  money  borrowed  for  mere  purposes  of  consumption, 
the  borrower  may  enjoy  a  gain.  Although  he  is  thoroughly 
aware  of  the  fact  that  he  will  have  to  repay  in  the  future,  with 
interest  in  the  meantime,  the  precise  sum  that  he  now  borrows, 
he  is  nevertheless  anxious  to  borrow.  This  is  due  to  two  facts: 
an  underestimate  of  the  future,  and  the  possibility  of  repay- 
ment in  instalments. 

His  sense  of  immediate  need  is  much  stronger  than  his  recogni- 
tion of  the  sacrifice  that  he  will  have  to  make  in  the  future  in 
order  to  repay  the  loan.  It  is  the  same  feeling  that  overcomes 
us  when  we  compare  the  foregoing  of  a  good  dinner  to-night 
with  the  foregoing  of  a  good  dinner  a  year  hence.  Our  present 
sense  of  sacrifice,  that  is,  our  real  subjective  cost,  is  smaller  in 
the  one  case  than  in  the  other.  This  is  true  even  though  we 
may,  at  the  end  of  the  year,  regret  our  action.  In  ordinary 
cases,  however,  the  action  will  not  be  regretted  but  will  be 
repeated  another  year. 

But,  secondly,  and  more  important,  private  credit  diminishes 
subjective  costs  not  only  by  the  mere  process  of  deferring  pay- 
ment but  by  making  possible  repayment  in  instahnents.  The 
essence  of  the  situation  is  found  here  in  the  graduabess  of  the 
repayment.  The  aggregate  burden  of  gradual  repayment  is 
less  than  the  sacrifice  involved  in  providing  for  the  whole  of  the 
original  amount  outright  at  once.  The  individual  who  borrows 
may  incur  a  gain  despite  the  obligation  ultimately  to  return 
the  same  aggregate  amount  in  the  future.  If  he  did  not  incur 
this  gain,  he  would  not  continue  to  borrow. 

We  are  now  in  a  position  to  grasp  the  social  importance  of 
credit.    Credit  increases  prosperity.    If  used  for  productive  pur- 


II 


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ESSAYS  IN  TAXATION 


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poses,  credit,  while  indeed  not  capital,  works  like  capital  and 
constitutes  an  aid  to  production.    It  renders  possible  the  same 
amount  of  output  with  a  smaller  cost  or  sacrifice.    It  accom- 
plishes this  by  taking  the  funds  out  of  the  hands  of  those  to 
^vhom  It  is  worth  relatively  little  and  putting  it  into  the  hands 
of  those  to  whom  it  is  worth  more  because  they  make  it  yield 
more.    The  man  who  lends  money  at  six  per  cent  does  so  pre- 
sumably because  he  has  a  surplus  capital  from  which  he  is  con- 
tent to  receive  six  per  cent  interest.    But  the  man  who  bor- 
rows the  fund  expects  to  make  more  than  six  per  cent  interest 
and  to  retain  the  surplus  in  the  shape  of  profit.    Could  the 
lender  utilize  the  fund  profitably  in  his  own  business  he  would 
not  lend  the  fund.    Rut  even  where  credit  is  utilized  for  purely 
consumption  purposes,  it  is  equally  advantageous,  because  by 
defernng  pajTnent  and  by  rendering  possible  repayment  in 
mstalments  rather  than  in  a  lump  sum,  it  lessens  subjective 
costs  or  sacrifices.    The  social  utiUty  of  credit  is  therefore  quite 
clear.    It  increases  the  wealth  of  the  community  bv  lessening 
the  subjective  sacrifices  of  certain  individuals  and   putting 
at  the  disposal  of  the  community  funds  where  they  will   be 
utilized  to  the  greatest  advantage,  thus  decreasing  costs  and 
mcreasmg  output.    Society  as  a  whole  is  thereby  enabled  to 
employ  those  services  with  which  it  can  more  easily  dispense. 

The  truth  of  this  assertion  is  not  invalidated  by  the  fact  that 
credit  may  be  abused.    If  the  man  who  borrows  at  six  per  cent 
puts  the  money  into  a  business  which  does  not  earn  six  per  cent 
the  community,  as  well  as  himself,  suffers  for  his  mistake! 
So,  in  the  same  way,  if  an  improvident  individual  borrows  for 
consiunption  purposes  and  finds  that  he  becomes  more  and 
more  hopelessly  entangled  with  the  passage  of  time,  he  may 
find  it  impossible  to  meet  the  debt,  even  in  instahnents,  and  his 
easy-going  reliance  upon  the  future  may  cause  his  ruin  as  well 
as  loss  to  the  lender.    The  fact,  however,  that  an  essentially 
sound  institution  may  be  abused  is  no  argument  against  its 
essential  soundness.    Credit,  like  speculation,  would  not  have 
become  the  outstanding  feature  of  our  present  economic  organi- 
zation if  it  did  not  fulfill  a  socially  useful  function.    The  modem 
economy  is  essentially  a  credit  economy. 

Public  credit  shares  this  character.  The  chief  difference  be- 
tween public  and  private  credit  is  in  the  relation  of  consumption 
credit  to  production  credit.  While  the  government,  like  the 
individual,  often  borrows  for  productive  purposes,  as  for  a 


LOANS  vs.  TAXES  IN  WAR  FINANCE  725 

government  railway  or  a  municipal  subwav,  most  existing 
national  loans  are  the  result  of  consumption  credit,  utilized 
to  pay  the  expenses  of  war  or  to  cover  current  deficits.  It  is 
fairly  well  agreed  that  just  as  a  prudent  individual  ought  not  to 
borrow  for  purposes  of  ordinary  consumption,  so  the  govern- 
ment ought  not  to  borrow  to  meet  its  current  expenditures. 
The  real  differences  arise  when  we  consider  extraordinary  ex- 
penditures. 

There  are  three  points  in  which  public  credit  differs  from 
private  credit.     In  the  first  place,  extraordinary  expenditures 
for  unusual  consumption  are  not  so  apt  to  occur  in  the  case  of 
the  individual  as  in  the  case  of  the  government.     Most  in- 
dividuals are  able  to  provide  a  reserve  fund  against  a  rainy 
day.    Government  revenue,  however,  ought  properly  never  to 
exceed   current   expenditures.     As  a   consequence,   when   an 
extraordinary  emergency  arises,  as  a  war,  the  utiUzation  of 
consumption  credit  becomes  legitimate.    In  the  second  place 
the  individual  lives  only  his  own  life;  if  he  borrows  largely  for 
consumption  purposes  he  will  not  always  find  it  easy  to  repay 
the  debt.    The  state,  on  the  contrary,  is  eternal.    The  govern- 
ment, accordingly,  has  a  much  longer  time  in  which  to  pay  off  a 
debt.    If,  for  any  reason,  it  Ijecomes  desirable  to  postpone  the 
payment  of  the  debt  to  the  distant  future,  the  justifiability 
may  be  stronger  in  the  case  of  the  government  than  in  the  case 
of  the  individual. 

In  the  third  place,  what  seems  to  be  consumption  credit  may 
m  the  case  of  the  government,  partake  of  the  characteristics  of 
production  credit.  A  legitimate  war  is  either  for  defensive 
purposes,  that  is,  to  maintain  the  existence  of  the  state,  or  for 
offensive  purposes,  in  order  to  procure  for  the  state  certain 
territories  or  rights  to  which  it  thinks  itself  entitled.  Since  in 
both  of  these  cases  a  foundation  is  laid  for  continued  or  even 
greater  prosperity,  the  expenditures  may  in  a  sense  be  called 
productive  in  their  nature.  Whether  a  particular  war  is  actually 
of  that  character  may  be  a  question;  but  surely  no  nation  will 
enter  upon  a  great  war  unless  it  is  deemed  legitimate.  And  if 
the  general  sentiment  of  the  nation  justifies  the- war,  if  the  ends 
to  be  achieved  transcend  the  sacrifices  that  are  incurred,  the 
war  expenditures  may  be  considered  in  the  broader  sense  of  the 
term  productive. 

For  these  three  reasons,  therefore,  public  credit  may  be  con- 
sidered even  more  important  than  private  credit.     Just  as 


1 


726 


ESSAYS  IN  TAXATION 


private  cralit  is  socially  useful  or  productive  of  wealth  and 
welfare,  so  pul)lic  credit  may  be  at  least  equally  beneficial.  Its 
utility  consists  in  the  fact  that,  through  borrowing  from  those 
in  possession  of  the  capital  rather  than  taxing  all  the  members 
of  the  community,  whether  or  not  they  have  the  capital,  it 
lessens  subjective  costs  or  sacrifices  and  puts  at  the  disposal  of 
the  government  those  services  in  the  community  with  which  it 
can  most  easily  dispense. 

It  might  be  claimed  that  the  advantages  of  private  credit  do 
not  attach  to  public  credit  because  in  the  one  case  we  are  dealing 
with  different  classes  in  the  community  and,  in  the  other,  with 
the  community  as  a  whole.  Why  would  not  the  same  ad- 
vantages be  secured,  it  might  be  said,  by  taking  from  the  pos- 
sible lenders  the  same  amount  in  the  shape  of  taxes?  This 
argument,  however,  is  really  illicit.  For  the  situation  con- 
templated is  not  only  most  unlikely  but  virtually  impossible. 
Under  eveiy  system  of  taxation  which  has  hitherto  existed— in 
democracies  as  elsewhere— we  find  some  taxes  at  least  levied 
on  business,  on  consumption,  on  exchange  and  on  other  sources 
than  wealth.  Even,  however,  if  the  tax  system  were  to  be  so 
changeti  as  to  consist  exclusively  of  taxes  on  accumulated 
w^ealth  and  income,  it  by  no  means  follows  that  the  funds  would 
be  forthcoming  from  the  individual  taxpayers  in  precisely  the 
same  proportions  that  they  would  have  been  supplied  by  the 
individual  bondholders.  For  some  recipients  of  large  incomes, 
at  least,  would  surely  give  u})  a  greater  sum  as  an  investment 
bearing  interest,  than  they  would  hand  over  as  a  forced  con- 
tribution representing  a  dead  loss.  The  psychology  of  the 
situation  consists  in  the  difference  of  the  reaction  to  a  vol- 
untary, as  contrasted  with  a  compulsory,  act.  Even  if  only  a  few 
individuals  contributed,  it  would  still  remain  true  that  the 
utilization  of  public  credit  would  in  this  way  put  at  the  disposal 
of  the  government  the  services  in  the  community  most  easily 
dispensed  with.  In  order  to  invalidate  this  statement  it  would 
be  necessary  for  the  government  to  take  by  taxation  from 
each  individual  absolutely  everything  above  the  necessary 
means  of  sut)sistence.  Only  then  would  this  particular  argu- 
ment as  to  the  advantage  of  loans  over  taxes  lose  its  force. 

But  even  in  this  most  unlikely  case,  where  precisely  the  same 
sums  would  }je  raised  from  each  taxpayer  that  would  otherwise 
be  contributed  by  each  bondholder,  it  nevertheless  remains 
true  that  loans  imply  a  lessening  of  subjective  costs  or  sacrifices. 


LOANS  vs.   TAXES  IN  WAR  FINANCE  727 

For  although  the  taxpayers  of  the  future  have  indeed  to  repay 
the   oan,  thoy  do  not  have  to  pay  the  amount  all  at  once  as 
would  be  necessary  in  the  case  of  the  sums  being  raised  im- 
mediately by  taxation.    Just  as  in  private  credit  the  aggregate 
burden  of  gradual  repayment  is  less  than  the  sacrifice  involved 
m  outright  provision  of  the  original  amount,  so  in  the  case  of 
public  credit  the  social  sacrifice  involved  in  the  periodic  pay- 
ment of  the  smaller  sum  represented  by  the  interest  and  amor- 
tization charge  is  less  than  the  buiden  involved  in  providing  the 
entire  amount  in  a  lump  sum.    The  phenomena  of  interest  and 
of  credit,    by  their  very  nature,  imply  that  the  burden  of  a 
successive  series  of  partial  pa^^ents  is  less  than  the  burden  of 
the  total  onginal  payment.    Just  as  the  individual  who  borrows 
may  incur  a  gain,  despite  the  obligation  to  return  the  same 
amount  m  the  future,  so  the  community  which  borrows  mav 
incur  a  sunilar  gain.    This  net  gain  in  the  case  of  pubHc  credit 
IS  represented  by  the  smaller  burden  involved  in  the  amortiza- 
tion quota. 

An  objection  to  the  above  argument  has  been  raised  bv 
Professor  Patten  who  casts  doubt  upon  the  possible  postpone- 
ment of  such  subjective  costs.  -Were  they  stated,''  he  tells 
us  they  would  be  found  to  be  feelings  which  we  compensate 
m  the  future  at  our  peril."  On  the  contrary,  we  may  say,  not 
only  is  there  no  peril  involved,  but  the  postponement  of  such 
subjective  costs  will  normaUy  exert  a  positive  influence  on 
present  objective  costs. 

The  statement  that  the  costs  of  a  war,  from  the  objective 
pomt  of  view,  must  be  met  in  the  present  is  of  course  entirely 
true.  The  guns  must  be  manufactured  now  and  the  supplies 
must  be  forthcoming  now.  It  is  now  that  they  are  needed  and 
not  m  the  future.  But  has  anyone  in  his  senses  ever  thought 
of  denying  that  fact?  And  is  there  any  difference  between 
public  credit  and  private  credit  in  this  respect?  If  we  buy  fur- 
niture in  instalments  can  any  one  deny  that  the  furniture  must 
be  produced  now?  If  a  railroad  secures  its  capital  in  large 
part  by  the  issue  of  fifty-year  bonds,  does  any  one  deny  that  the 
^S.  N.  Patten,   "MandeviUe  in  the  Twentieth  Century,"  Amencan 

^mri'  T^^'  ^"i-  .?n  ^'  P-  ^\F'.'^'  ^^^^^  ^y  *h^  P^^^^^t  writer 
WTio  IS  the  Twentieth  Century  MandeviUe?"    Ibid.,  pp    339    et  sea 

Professor  Patten  is  compeUed  to  take  the  extraordinary  position  that 

save  in  the  case  of  short-time  bank  credit  "the  nearer  we  come  to  eliminat^ 

'^f  Tf^  V**i!f,  ^f^^""  ^""^  ^^^  ''^^'''''"  (P-  ^4>-    This  would  put  us  back 
into  the  Middle  Ages. 


728 


ESSAYS  m  TAXATION 


nulroad  must  be  buUt  now?  If  we  erect  a  skyscraper  to  an  over- 
whelming extent  by  the  issue  of  long-time  securities,  does  that 
miply  that  the  skyscraper  must  not  be  built  now?  In  all  these 
cases  the  articles  or  commodities  are  produced  now:  but  the 
essential  pomt  is  that  they  are  not  paid  for  now,  at  least  not  in 
cash:  they  are  paid  for  in  promises;  or,  to  put  it  more  exactly, 
the  cash  handed  over  to  the  sellere  of  material  and  labor  is 
almost  entirely  borrowed.  There  is  a  present  production  but  a 
future  payment  The  objective  costs  must  indeed  be  met  now- 
the  labor  must  be  hired  and  the  materials  secured.  These  costs 
cannot  be  postponed:  that  goes  without  saying.  But  the  sub- 
jective costs  of  the  producer  are  lightened.    In  fact,  they  are 

Sm  ,rT    ^^  ""^r*  ^^^  ^^^y  '•^''t  "P°"  the  objective 
costs.    If  the  furniture  buyer  could  not  pay  for  the  furniture 

m  mstalments  he  would  not  buy  the  furniture  at  all:  and  with 
the  lessened  demand  for  the  furniture,  there  would  be  less 
produced.  If  the  proposed  railway  could  not  market  its  bonds 
J^/J"  Z7  ^°"'''  "°*  ^\  built.  If  the  real-estate  operato; 
could  not  borrow  through  his  first,  second,  and  third-mortgage 
loans,  the  skyscraper  would  not  be  constructed.     In  everv 

Tn!!;  ^t  '  K^r!"^  °^.^^^  subjective  costs  which  would  ensue 
upon  the  abolition  of  credit  would  react  upon  the  objective 
costs.  If  there  were  no  credit  in  these  cases  there  would  be  no 
production;  or  If  there  were  any  production,  it  would  be  at 
a  veiy  much  higher  cost;  that  is,  there  would  be  less  pro- 
duction. Credit,  in  other  words,  increases  production  bv 
d«;reasi„g  c(«ts.  The  decrease  of  subjective  individual  coste 
may  lead  to  a  decrease  of  objective  social  costs.  The  diminution 
ot  the  total  aggregate  sacrifice  is  equivalent  to,  or  is  followed 
by,  a  greater  social  production. 

But  if  all  this  is  true  of  private  credit,  why  is  it  not  equally 
tnae  of  pubhc  credit?  If  it  is  true  of  a  railway  in  private  hands, 
why  IS  It  not  true  of  a  railway  that  belongs  to  the  government? 
And  If  It  IS  true  of  public  credit  in  peace  time,  why  is  it  not  true 
of  pubhc  credit  m  war  time?  As  a  matter  of  fact,  it  is  as  true 
of  war  finance  as  of  peace  finance.  The  guns  and  the  suppUes 
must  be  furnished  now.  But  if  we  were  to  rely  entirely  upon 
taxes  and  not  at  all  upon  loans,  the  point  is  that  there  would 
be  far  1^  likelihood  of  their  being  produced  now.  They  are 
produced  now  because  they  can  in  large  part  be  paid  for  in 
the  future  through  the  use  of  public  credit.  If  they  had  to  be 
paid  for  now  m  cash  raised  by  taxation,  not  so  much  would  be 


:  I 


LOANS  vs.   TAXES  IN  WAR  FINANCE  729 

produced  because  the  excessive  taxes  would  cripple  productioi) 
As  l^rofessor  Scott,  of  Glasgow,  so  well  puts  it:  ''If  the  choice 
IS  between  immediate  and  deferred  taxation,  why  should  the 
burden  be  postponed,  would  it  not  be  better  to  meet  it  at  once 
and  leave  the  future  unembarrassed? '^  His  answer  is  this- 
Ihe  mere  fact  of  giving  the  taxpayer  time  to  adjust  himself 
to  a  new  and  heavy  burden  will  lighten  it  materially  for  him 
Also  industry,  in  time,  has  a  chance  of  expanding  to  provide  a 
part  of  the  new  imposts." 

It  is  clear  then,  not  only  that  the  lessening  of  the  subjective 
costs,  that  IS  of  the  burden  of  paying  for  the  supplies,  is  not 
necessarily  attended  by  perils,  as  Professor  Patten  thinks  but 
that  as  a  matter  of  fact,  this  postponement  of  payment  involved 
m  the  dunmution  of  subjective  costs  may  m^n  not  only  a 
smaller  total  aggregate  sacrifice  but  even  a  diminution  of  the 
objective  costs  in  the  present.  Public  credit,  in  other*  words 
may  give  us  more  guns  and  more  supplies  now. 

If,  then  it  is  true  that  the  utilization  of  public  credit  may 
involve  a  lessenmg  of  subjective  costs  or  real  burdens  upon  the 
community,  can  it  m  the  second  place  accomplish  this  by  trans- 
terrmg  a  part  of  the  burden  to  the  future? 

It  might  plausibly  be  argued  that  this  is  impossible.  It  might 
be  said,  for  instance,  that  while  it  is  true  that  the  future  tax- 
payer suffers  a  burden  in  so  far  as  he  has  to  pay  taxes  in  order 
to  raise  the  funds  which  are  due  to  the  bondholder,  the  onlv 
result  IS  a  transfer  of  the  burden  from  one  class  in  the  com"- 
munity  to  the  other.  The  taxpayers,  it  might  be  said,  suffer  a 
disadvantage,  but  the  bondholders  who  have  their  loan  repaid 
to  them  secure  the  benefit.  Since  the  benefits  counterbalance 
the  disadvantages  there  is  no  net  burden. 

This  argument,  however,  is  fallacious.  When  the  bondholder 
invests  m  the  loan  he  suffers  indeed  a  sacrifice  in  the  sense  of 
giving  up  the  funds  which  he  might  otherwise  employ  This 
sacrifice  indeed  is  compensated,  and  more  than  compensated 
by  a  benefit.  The  benefit,  however,  that  accrues  to  him  is  Ui 
be  measured  by  the  annual  interest  that  he  receives  on  the 
bond.  If  he  had  not  invested  in  the  government  bond  he  would 
have  invested  in  something  else  or  would  have  allowed  his 
money  to  remam  in  the  bank.  In  any  case  he  would  simply 
have  gotten  interest  on  his  capital;  and  it  is  immaterial  whether 
his  capital  is  represented  by  a  deposit  account  in  the  bank  or 
by  a  private  security  or  a  pubhc  bond.    The  benefit  that  the 


fl 


<  n 


730 


ESSAYS  IN  TAXATION 


bondhojder  receives  in  return  for  the  sacrifice  of  yieldine  the 
money  IS  the  accumulated  annual  interest  on  the  bo^d  By  the 
tune  that  the  bond  falls  due  there  is  no  more  benefit. aceru4  to 

hi  ^''/''""'••^f'^^y^^^lable  at  the  market  price.  Even 
before  it  i^a  Is  due,  the  holder  can  dispose  of  it  and  get  as  much 

loa"'  TJT  T"''  ''^  r*^^  ""*"  '"^^  -pirf^ion  oT  the 
loan  If,  as  often  happens,  the  bond  stands  at  a  premium  he 
«.uld  even  got  „,ore  by  selLng  it  beforehand.     Or,  i?™e^'not 

Sr"  h  wi"''^  ^■"■'  """^.^  '*  -  --'"••V  f;r  a  balrioa^' 
JIM  d6  he  would  otherwise  utilize  an  industrial  I)ond  or  anv 
other  security.  In  reality,  therefore,  instead  of  speTidng  oTa 
benefit  accrumg  to  the  hokler  when  his  bond  is  paid  off  we  ough^ 
really    o  speak  of  an  additional  burden  or  sacrifice  Tmposed 

funds  Long-tune  bonds  are  in  fact  generally  preferred  bv  the 
investor  in  order  to  obviate  thi«  necessity^rSnves  ment 

^'ed  IZ  T'?f  '"  ''''  '^''"*'^"*'°"  *•>-*  the  .sacr ficT ii": 
posed  upon   the  future  taxpayer  is  counterbalanced  bv  the 

t^3izT:hrfh*°  *'''  '°"f  "'t--  ^''"^  ^°"-t«  -  ^he  failt 

£n  S   Whenl  LT;T,  "?"  *^  ''"""^'  '"t^'^'-*  that  has 
i^^^u-      "?'t^*'*»fd  falls  due  the  benefits  cease.    There  is 
If  anything,  a  burden  rather  than  a  benefit  now  accruing  to  hk^i 

On  the  question  of  whether  it  is  pessible  through  the  utilization  of  a 


LOANS  m.   TAXES  IN  WAR  FINANCE  731 

There  is  another  fallacy  lurking  in  the  statement  that  the 
burden  upon  the  future  taxpayer  is  compensated  by  the  benefit 
nnnn  Th'TT^  '?  '^'  bondholder.  There  is  indeed  a  burden 
upon  the  future  taxpayer,  but  not  of  the  kind  imagined.  Pubhc 
debts  of  large  amounts  are  never  paid  in  the  manner  supposed 
When  a  public  debt  falls  due,  it  is  not  paid  out  of  the  proeel 
of  taxes  levied  upon  the  taxpayers  of  that  particular  year 
If  the  debt  IS  not  refunded,  but  actually  paid  off  it  wm  be 
extinguished  by  utilizing  the  funds  which  have  been  ac^S 
lated  for  a  term  of  years.    If  there  is  a  sinking  fund,  the  buX 

oul  Tn"*""";:  "'"  '^  rr  "^^'^  •'^  ^'^'^  -"-•  amo  trzario" 
quota.  In  such  a  case  the  burden  will  be  borne  not  bv  the  tax- 
payers at  the  tune  when  the  bond  falls  due,  but  in  instatiems 
by  the  successive  annual  taxpayers,  beginning  with  the  year 
when  the  bond  was  firsf  issued.  The  same  is  true  if  the  bJnds 
are  serial  bonds  the  instalments  of  which  fall  due  periodicallv 

ly  b':  born'  T'^*^^^*"  '^P^^^-*'"^  the  lastTsfaSt 
will  be  borne  by  the  taxpayers  at  the  expiration  of  the  loan 

tie  benefit  ^'"."^'"f  ""^  bond  as  a  type  it  may  be  said  that 
the  benefit  accrmng  to  the  bondholder  is  represented  by  the 
accumulated  interest  and  that  the  burden  restfag  upon  thTta^! 
payers  is  coniposed  of  the  entire  debt  service,  that  is  the  interSt 
charge  together  with  the  amortization  quot^  since  the  n teS 

burden.  The  amortization  quota  is  the  net  burden  resting  upon 
the  successive  contingents  of  taxpayers  until  the  sinking  fund 
IS  completed  or  the  debt  is  entirely  paid  off.  That  this  net 
burden  upon  the  future  may  be  outweighed-and,  in  general 
more  than  outweighed-by  the  net  benefit  accrui,^^  to  the 
present  has  been  indicated  above. 

We  niay,  therefore,  consider  it  as  established  that  it  is  possible 
not  only  to  diminish  the  subjective  sacrifice  on  the  present,' 

^^^nZ"'%or'vl^!'f  '''%b."'^™  ^  the  future,  there  is  little  diilerence 
between  us.    For  Professor  Pigou  agrees    pp.  650-1)   that  there  are  at 

'^viz:r:^:jT  "^  '^''*  ^"^  "^*'°"^  '^^"--^  °^  thet;:r:r; 

But  on  the  general  question  as  to  whether  these  burdens  on  the  future 
are  compensated  by  the  advantages  to  the  present,  PmfZr  Pig™  fa 
eunously  non-conunittal,  either  not  alluding  to  some  of  the  a^tmente 

^^^^^^^\-''  -~  -  theSnotrpZoi:^^ 


»'•     II 

■'  \ 


lb 


\ 


m 


m\ 


•h 


I 


732 


ESSAYS  IN  TAXATION 


but  also  to  put  a  share  of  the  burden  upon  the  future.  It  has 
also  been  established  that  the  device  of  public  credit  necessarily 
accomplishes  the  second  result  in  effecting  the  first.  The 
problem  at  issue  is  the  cost  of  making  final  settlement  of  the 
war  bills  of  the  government.  This  settlement  must  be  made 
by  taxpayers  and  it  can  be  postponed.  If  the  government 
borrows,  it  obtains  money  from  people  who  get  a  good  invest- 
ment and  who  are  making  a  very  slight  sacrifice.  The  sacrifice 
on  the  part  of  a  purchaser,  rich  or  poor,  of  a  Liberty  Bond  is 
much  less  than  the  sacrifice  of  a  taxpayer  who  gives  up  his 
money  without  return.  The  sacrifice  of  the  taxpayers  who 
must  pay  the  bills  can  be  postponed  and  this  postponement 
may  involve  the  undoubted  advantage  of  spreading  large 
payments  over  a  period  of  years. ^  Public,  credit,  if  correctly 
employed,  may,  in  shifting  a  part  of  the  subjective  sacrifice  to 
the  future,  lessen  the  total  real  costs  of  a  war  to  the  com- 
munity as  a  whole,  viewed  as  a  continuing  entity. 

III.  Ought  the  Burdens  of  a  War  be  Shared  with  the  Future? 

Although  it  is  possible,  as  we  have  just  seen,  to  shift  a  part  of 
the  burden  from  the  present  to  the  future,  the  next  problem  is 
as  to  when,  if  ever,  this  is  justifiable.  The  point  at  issue  here, 
be  it  observed,  is  not  as  to  the  relative  advantages  of  loans 
versus  taxes,  but  as  to  the  classes  of  cases  when  loans  are  to  be 
permitted  as  a  matter  of  principle.  In  order  to  solve  this 
problem  we  need  a  more  detailed  analysis  of  public  expenditures. 

For  our  purposes  all  public  expenditures  may  be  divided  into 
two  classes:  current  and  capital  expenditures.  Current  ex- 
penditures are  those  incurred  for  carrying  on  the  ordinary 
business  of  govemmenc  while  maintaining  its  property  or  plant 
at  the  customary  level.  Capital  expenditures  are  those  in- 
curred for  increasing  the  property  or  plant  of  the  community. 

Capital  expenditures  may  again  be  divided  into  expenditures 

» Mr.  Hartley  Withers,  who  originally  held  this  view,  has  been  so  in- 
fluenced by  the  rather  hasty  pronouncement  of  some  American  writers 
that  he  has  recanted.  Cf.  his  Our  Mmey  and  the  State,  1907,  p.  29.  But 
even  he  balks  at  the  proposition  that  public  borrowing  is  always  unjusti- 
fiable, and  accepts  it  as  defensible  when  employed  for  productive  purposes 
(Ibid.,  p.  43).  Had  he  pushed  his  analysis  a  little  further  he  would  have 
realized  the  fact  that  no  distinction  can  be  dra\\'n  between  consumption 
and  production  credit,  and  that  the  economic  utility  of  credit  may  attach 
equally  to  both  forms. 


LOANS  vs.   TAXES  IN  WAR  FINANCE 


733 


for  self-supporting  and  for  non-self-supporting  purposes.  Ex- 
penditures of  the  first  kind  are  seen  in  the  case  of  water-works 
where  the  revenues  are  expected  to  defray  more  than  the  cost. 
Here  it  is  entirely  legitimate  to  issue  bonds,  because  although 
the  burden  upon  the  present  is  diminished,  there  will  be  no 
burden  upon  the  future.  By  the  time  the  bonds  expire,  a 
sinking  fund  will  have  been  accumulated  out  of  the  revenues 
which  will  also  in  the  interval  have  provided  for  the  payment 
of  the  annual  interest.  It  is  for  this  reason  that  in  the  city  of 
New  York,  for  instance,  not  only  the  water  and  dock  bonds, 
but  those  issued  for  any  municipal  improvement  the  revenue 
from  which  will  defray  the  interest  together  with  an  amortiza- 
tion quota,  are  by  law  excluded  from  being  counted  in  the 
debt  subject  to  constitutional  limitations  as  to  size.  If  such 
improvements  had  to  be  paid  for  out  of  taxes  they  would  fre- 
quently not  be  made  at  all. 

Many  capital  expenditures  are,  however,  incurred  for  non- 
self-supporting   purposes.     The   funds,    in   other   words,   are 
spent  for  additions  to  the  community  plant  or  property  from 
which  no,  or  only  little,  money  revenue  is  expected.    The  divi- 
dends are,  in  whole,  or  in  part,  of  a  non-material  kind.    Such 
expenditures  may  be  further  subdivided  according  as  they 
are  recurring  or  non-recurring.    An' example  of  the  first  kind 
is  a  schoolhouse.    A  schoolhouse  represents  an  addition  to  the 
capital  or  permanent  property  of  the  community.    Under  the 
American  system  it  is  not  used  for  purposes  of  revenue,  as  no 
fees  are  charged.    In  a  growing  city  where  population  is  con- 
tinually increasing  it  is  obvious  that  more  schoolhouses  will 
have  to  be  built  every  few  years  and  perhaps  even  annually. 
Since,  therefore,  the  same  capital  expenditure  will  have  to  be 
made  every  year,  or  ahnost  every  year,  it  is  proper  that  it  should 
be  paid  for  every  year,  or  almost  every  year.    In  other  words, 
the  cost  of  schoolhouses  in  a  constantly  growing  community 
ought  to  be  defrayed  out  of  taxes  on  the  pay-as-you-go  principle. 
The  situation  is,  however,  different  with  the  other  class  of  non- 
self-supporting  capital  expenditures,  namely,  those  of  a  non- 
recurring   kind.     Take,    for    instance,   the  purchase  by  the 
government  of  the  telegraph  or  telephone  system  with  the 
intention  of  so  reducing  charges  as  not  even  to  meet  running 
costs.    Or,  bettor  still,  take  the  building  of  a  great  art  museum 
in  a  city  or  the  purchase  of  a  comprehensive  system  of  parks. 
In  the  ordinary  couree  of  events  a  considerable  period  would 


I 


734 


ESSAYS  IN  TAXATION 


!*■ 


k 


elapse  Wore  another  art  museum  or  another  such  system  of 
parks  ^I  be  neederf.    Since  the  museum  or  park  wil UonTnue 
to  benefit  the  community  as  a  whole  for  mLy  yea.^,  there  is 
evidently  an  mipropriety  in  putting  the  entire  burden  upon  the 
taxpayers  m  any  one  year.    To  attempt  to  do  this  would  no? 
only  be  mequitable  in  itself,  but  would  also  defeat    s  purposed 
for  the  larger  the  expenditure,  the  more  disincline.1  wouTd  the 
taxpayers  of  any  one  year  be  to  authorize  the  outfav     The 
probable  result  would  be  delay,  or  oven  complete  fam.re   to 
authorize  much-needed  improvements.    In  the  case,  therefore 
o    non-recurnng    non-sclf-supporting  capital  expendi  ures  the 
utihzation  of  pubhc  credit  is  cleariy  permissible 

m.mpn?  *"  f  T""^  f  ''°''^^"'  ""•'  °'  t^^'l^eht  zone  where  the  ar- 

lake  the  New  York  court-house  problem  as  an  example.  It  is 
d^cult  to  say  whether  this  ought  to  be  called  a  recurring  or  a 
non-rjurnng  expenditure.  A  t.cw  court  house  is  indee^l  not 
needed  every  year.  It  is  only  a  few  decades,  however,  s.^e  the 
present  court  house  was  rebuilt.  The  same  is  tn.e  of  brSges  in 
a  rapidly  growmg  community.  Mor.,  than  a  certain  number 
of  bndg,^  wJ  probably  not  be  required  for  a  long  t,me  But 
m  the  'nterval  new  or  better  bridges  may  be  neede.1  eve^y  few 
year.     Where  the  opposing  arguments  a  re  so  close,  it  is  evIdentlT 

Opposed  to  the  capital  expenditures  of  government  are  the 
current^expenditures.  These  may  be  divide!  into  ordina,^  and 
extraordmaor  expenditures.     Ordina,^-  expenditures  are  those 

i  In"  V  '"""f  ^°'  't'  "''^"'"'^  ^•"^'^  »f  government  from 
buLt  Tt^tl  ""T.^  anticipated  and  arranged  for  in  the 
budget.  As  to  these  there  is  no  question  but  that  thev  should 
be  met  entirely  out  of  the  proceeds  of  taxes.  One  of  the  glaring 
abuses  of  the  old  Tammany  regime  in  New  York  City  was  he 
way  in  which  it  kept  the  tax  mte  down  by  borrowing  money 
for  the  ordmaiy  current  expenditures:  as,  for  instance  thp 
issue  of  twenty-year  bonds  for  the  purchas'e  of  brooms  whkh 
lasted  only  a  few  months. 

whth'''''''^'?'^'!!?^?^^*"''''  ^"  *^^  ^^^^^  ^^^^^  are  those 
uhich  cannot  well  be  foreseen  or  predicted  with  any  reasonable 

accuracy:  as  the  result  of  some  unforeseen  contingency  thev 

are  out  of  the  re^gular  order,  that  is,  they  are  extraordinary   "^ 

H^raordmary  current  expenditures  may,  however,  like  the 


LOANS  vs.   TAXES  IN  WAR  FINANCE  735 

capital  expenditures  mentioned  above,  be  sulxlivided  into  re- 
curring   and    non-recurring    expenditures.      A    non-recurring 
extraordinary  expenditure  is  typified  in  the  case  of  the  Chicago 
or  the  Boston  fire.    Since  the  outlay  needed  to  keep  these  com- 
munities alive,  or  to  repair  the  ravages  of  the  conflagration, 
may  not  be  expected  ever  to  occur  again,  or  certainly  not  for  a 
long  future,  it  would  be  manifestly  improper  to  saddle  the  entire 
burden  upon  the  unfortunate  taxpayers  of  that  particular  year. 
The  probability  is  that  if  any  attempt  were  made  to  do  so  the 
needed  repairs  could  not  be  made  at  all,  or  certainly  not  to  the 
extent  that  would  be  appropriate.    Of  a  similar  character  would 
be  the  extraordinary  expenditures  occasioned  by  a  great  flood 
or  famine  in  a  country  unaccustomed  to  such  catastrophes. 

On  the  other  hand,  there  are  certain  classes  of  extraordinary 
expenditures  the  recurrence  of  which  may  be  reasonably  expected, 
although  the  date  of  the  recurrence  is  unknown.  This  would 
be  the  case  with  earthquakes  in  a  country  like  Italy,  or  famines 
in  a  country  Uke  India,  or  tornadoes  in  some  parts  of  the  United 
States.  In  such  cases  it  is  entirely  proper  to  accumulate  out 
of  the  proceeds  of  taxation  a  fund  which  can  ultimately  be  used 
for  that  purpose  when  the  occasion  arises.  Since  the  con- 
tingency may  occur  at  more  or  less  periodic  intervals  it  would 
manifestly  be  unwise  to  shift  the  burden  upon  the  future;  for 
before  the  future  comes,  another  contingency  of  the  same  kind 
may  have  occurred. 

When  finally  we  come  to  such  expenditures  as  these  of  modern 
wars,  the  question  of  exact  classification  is  attended  with  con- 
siderable difliculty.  It  is  indeed  true,  that  as  long  as  human 
nature  remains  what  it  is  and  the  fundamental  causes  of  an 
economic  and  racial  character  are  not  removed,  every  nation 
must  look  forward  to  periodic  outbreaks  of  this  scourge.  Cer- 
tainly there  is  nothing  to  predispose  us  to  the  belief  that  the 
history  of  the  world  was  so  totally  changed  in  the  year  1918. 
In  a  certain  sense,  therefore,  the  extraordinary  expenditures 
of  a  war  may  be  put  in  the  class  of  recurring  expenditures. 
The  recurrence,  however,  of  such  a  gigantic  war  as  the  late 
world  conflagration  cannot  be  regarded  as  immediate.  It  is  to 
be  expected  that  it  will  take  at  least  several  decades  for  the 
various  belligerents  to  recover  from  the  strain  and  stress  of  the 
conflict.  In  the  meantime,  whether  it  be  one  decade  or  several 
decades  that  elapse,  the  benefits,  such  as  they  are,  in  any  par- 
ticular country  necessarily  attach  to  the  intervening  years. 


11 


»- 

J 


r  > 


if 


736 


ESSAYS  IN  TAXATION 


And  at  all  events,  it  is  not  legitimate,  even  if  there  are  no 
benefits  at  all,  to  put  the  entire  burden  upon  those  who  happen 
to  be  taxpayei-s  during  the  course  of  the  war.  When  we  speak 
of  the  distinction  between  the  present  and  the  future,  it  is  not 
necessary  to  conceive  of  the  future  as  the  future  generation 
or  the  future  century.  There  are  all  manner  of  changes  in  the 
taxpaymg  abilities  of  the  citizens  within  a  century  or  even 
within  a  generation.  And  with  reference  to  the  *  particular 
circumstances  of  the  recent  conflict,  if  it  was  a  war  to  make 
democracy  safe,  it  is  certainly  just  that  the  coming  decades 
which  will  enjoy  the  benefits  of  security  should  bear  some  part 
of  the  cost  of  preserving  it. 

The  conclusion,  therefore,  would  be  that  in  the  case  of  a 
great  war  it  would  meet  aU  the  demands  of  justice  to  put  part 
of  the  burden  upon  the  present  taxpayers  and  to  shift  the  re- 
mainder upon  the  taxpayers  of  succeeding  years,  with  the  under- 
standing that  all  the  charges  of  the  war  will  finally  have  been 
met  before  the  period  when  the  recurrence  of  a  similar  out- 
break is  within  the  reahn  of  probability.  This  conclusion  in 
other  words  shows  the  essential  legitimacy  of  utiUzing  both 
loans  and  taxes  in  times  of  war. 


f 


IV.  The  Disadvantages  of  Loans 

The  net  gain  involved  in  public  credit  may  be  impaired  or 
even  converted  into  a  loss  in  three  ways:  (1)  if  exclusive  use  is 
made  of  public  credit;  (2)  if  the  system  of  taxation  after  the 
war  IS  maternally  changed  to  the  disadvantage  of  the  community; 
(3)  if  public  credit  is  so  abused  as  to  lead  to  serious  inflation! 
Let  us  consider  each  of  these  in  turn: 

1.  All  credit  rests  on  a  substratum  of  cash.    Private  credit  is 
an  adjunct  of  capital;  but  it  must  depend  on  capital.    The  loans 
that  a  bank  can  make  ought  never  to  exceed  a  certain  percentage 
of  the  reserves.    The  volume  of  credit  can  always  be  greater 
than  the  amount  of  the  cash  reserve;  but  it  cannot  safely  be 
independent  of  that  amount.    In  the  same  way  the  attempt 
to  finance  a  gigantic  war  entirely  by  loans  without  any  solid 
basis  of  taxation  would  also  represent  unsound  finance.    The 
resulting  loss  of  confidence  would  manifest  itself  in  a  deprecia- 
tion of  successive  issues  of  government  bonds  and  would  ul- 
timately cause  embarrassment  or  disaster.    But  just  as  a  bank 
may  issue  several  dollars  of  credit  for  one  dollar  of  cash  so  a 


LOANS  vs.   TAXES  IN  WAR  FINANCE 


737 


government  may  borrow  for  war  purposes  considerably  more 
than  it  raises  by  taxation  with  equal  advantage  to  all  con- 
cerned. To  finance  a  war  entirely  by  loans  is  inadvisable;  to 
finance  a  war  in  large  measure  by  loans  is  legitimate.  Em- 
ployed in  moderation  and  based  on  a  solid  foundation  of 
largely  increased  war  taxation,  war  loans  are  adyantageous  in 
reducuig  war  costs.  But  the  foundation  of  taxation  must  sup- 
port the  edifice  of  loans.  Unless  taxes  are  levied  to  an  amount 
at  leasLjifi£.essary  iQ  provide  for  the  interest  on  thp^  npwJoaTij 
as  well  as  for  a  reasonable  amortization  quota  or  additional 
sums  cajculated  to  sink  the  debt  within  a  reasonable  period, 
i^e  advantages  of  war  loans  will  disappear.  This  is  the  serious 
danger  to  which  some  of  the  belligerents,  like  France,  Russia 
and  Germany,  succumbed  in  the  recent  conflict. 

2.  If  taxes  during  the  war  were  to  be  raised  entirely  from 
those  best  able  to  pay,  and  if  the  tax  system  were  to  be  so  altered 
after  the  war  as  to  bear  with  severity  upon  those  less  able  to 
pay,  the  advantage  of  loans  over  taxes  would  be  impaired.  It 
might  be  claimed,  for  instance,  that  the  ordinary  system  of 
taxation  in  peace  times  is  influenced  so  largely  by  the  richer 
classes  that  wealth  escapes  its  share.  As  a  result  of  a  war,  how- 
ever, the  wealthier  classes  will  become  more  patriotic  and  will 
be  more  ready  to  contribute.  Even  if  this  should  not  be  the 
case,  the  very  immensity  of  the  sums  to  be  raised,  it  might  be 
said,  will  make  it  impossible  to  secure  what  is  needed  from 
taxes  on  general  consumption  and  will  necessitate  resort  to 
taxes  on  wealth.  To  raise  any  part  of  war  expenditures,  there- 
fore, by  loans  instead  of  by  taxes  simply  means  that  the  less 
affluent  classes  will  ultimately  have  to  pay  more.  This  involves 
a  serious  social  maladjustment. 

It  may  be  questioned,  however,  whether  such  an  argument  is 
not  in  reality  illicit.  For  we  have  here  a  comparison  not  be- 
tween loans  and  taxes  but  between  two  different  systems  of 
taxation.^  It  is  conceded  that  if  taxation  after  the  war  could 
be  based  upon  the  same  general  principles  as  taxation  during 

*  Professor  Pigou,  with  whom  this  argument  originated,  does  not  com- 
pare taxes  in  general  with  loans  in  general,  but  taxes  on  the  wealthy 
with  taxes  on  the  poor.  "Under  the  tax  method  the  rich  and  moderately 
rich  really  shoulder  the  whole  burden  of  the  charge  that  is  laid  upon  them. 
Under  the  loan  method  they  do  not  do  this,  because  they  are  compensated 
afterwards  through  taxes  laid  for  that  purpose,  .partly  on  themselves, 
but  partly  on  other  and  poorer  sections  of  the  community."  The  Economy 
and  Finance  of  the  War,  1916,  p.  70. 


i 


I 


')1 


738 


ESSAYS  IN  TAXATION 


the  war,  the  entire  argument  would  fall  away.^  But  this,  we 
are  told,  is  exceedingly  unlikely.  The  enthusiasm  engendered 
by  the  war,  which  will  make  the  wealthy  willing  to  pay  greater 
taxes,  will  subside  after  the  war.^ 

The  retort,  however,  at  once  presents  itself:  what  if  peace 
taxes  should  be  better  than  war  taxes?  It  might  plausibly  be 
argued  that  during  the  enthusiasm  engendered  by  a  war  the 
great  mass  of  the  people,  and  not  only  the  very  rich,  might  be 
willing  to  endure  extra  burdens;  whereas  after  the  return  of 
peace  they  would  insist  upon  a  more  equitable  distribution 
of  the  burden.  As  a  matter  of  fact  the  fiscal  history  of  our  own 
Civil  War  would  tend  to  bear  out  this  theory.  The  tax  system 
during  the  Civil  War  was  composed  to  an  overwhehning  extent 
of  burdensome  taxes  on  the  great  mass  of  the  community. 
The  income  tax,  for  instance,  was  slight  as  compared  with  the 
tax  on  manufactured  articles.  After  the  return  of  peace,  on 
the  other  hand,  these  l)urdensome  taxes  were  removed  one 
by  one  and  the  income  tax  was  among  the  very  last  to  disappear. 
Instead  of  the  tax  system  after  the  war  becoming  progressively 
worse  or  more  unjust,  it  became  progressively  better,  or  less 
unjust.    The  same  thing  is  true  of  the  fiscal  history  of  other  wars. 

In  tnith,  however,  such  an  interpretation  would  be  just  as 
invalid  as  the  preceding  one.  There  is  no  necessary  or  probable 
tendency  in  the  one  direction  or  in  the  other.  Some  systems 
of  war  taxation  have  been  better,  and  some  have  been  worse, 
than  corresponding  systems  of  peace  taxation.  There  is  nothing 
m  the  nature  of  war  or  peace  which  will  fundamentally  affect 
the  situation.  No  one  class  in  the  community  has  a  monopoly 
of  loyalty.  History  does  not  show  that  either  the  rich  or  the 
poor  are  more  patriotic.  The  real  forces  which  make  for  more 
equitable  taxation  are  the  growing  democratization  of  the 
community  with  an  increasing  realization  of  the  principles  of 

^Professor  Durand  tells  us  '•  sf  we  could  assure  ourselves  that  the  dis- 
tribution of  taxes  after  the  war  would  be  as  the  distribution  of  taxes  during? 
the  war,  there  would  he  little  choice  between  taxation  and  borrowing  " 
Financial  Mobilization  for  War,  papers  presentod  at  the  Joint  Conference 
of  the  Western  Economic  Society  and  the  Ciry  Club  of  Chicago,  June  21 
and  22,  1917,  n.  18. 

« Professor  Durand  bases  his  whole  argument  on  the  assumjition  that  the 
post-war  taxes  would  be  less  equitable  than  the  war  taxes.  He  concedes 
that  this  13  not  a  recessary  resuft,"  but  he  believes  that  "the  great  po- 
litical power  of  the  well-to-do  classes  would  almost  certainly  enable  them 
if  they  sought  to  do  so,  to  shift  part  of  the  burden  on  the  poorer  classes' 
and  they  would  probably  seek  to  do  so.'    Op.  cU.,  p.  26.  ' 


WANS  vs.   TAXES  IN  WAR  FINANCE 


739 


justice.  Modern  systems  of  taxation,  in  war  as  in  peace,  are 
everywhere  more  equitable  than  former  systems  because  of 
the  gradual  prevalence  of  these  two  factors.  There  is  no  warrant 
for  the  assumption  that  the  return  of  peace  will  check  this 
progress  of  democratization.  There  is  no  adequate  founda- 
tion for  the  belief  that  in  a  democracy  the  fundamental  causes 
which  make  for  justice  in  taxation  will  be  less  strong  in  peace 
than  in  war.  A  faulty  analysis  of  the  history  of  taxation  and  of 
democratic  progress  is  not  a  sufficiently  firm  basis  on  which 
to  predicate  the  inferiority  of  loans. 

3.  The  third  disadvantage  of  loans  is. alleged  to  be  the  tend- 
ency to  inflation.  As  to  the  dangers  and  shortcomings  of 
inflation,  the  burdens  of  which  are  borne  in  large  part  by  the 
less  affluent  classes,  it  is  unnecessary  to  speak.  That  loana. 
may  lead  to  inflation  is  undoubted;  that  loans  necessarily  lead 
to  more  inflatibrilhan  would  be  broughr^trontrtorQihermethods^ 
of  secuiiiii^  reveuue,  is  quite  another  matter. 

To  what  extent  can  it  be  said  that  loans  lead  to  mflation?  In 
the  case  of  foreign  loans  the  question  can  of  course  not  arise 
so  far  as  the  home  country  is  concerned.  Domestic  loans,  how- 
ever, may  be  derived  from  five  sources: 

(a)  From  the  liquid  or  free  loanable  capital  in  existence. 
Large  sums,  the  results  of  previous  accumulation,  are  always 
found  ready  for  investment  in  the  financial  centers.  In  the 
United  States  these  are  to  a  great  extent  ioaned  on  the  stock 
exchange  and  used  for  purposes  of  speculation.  The  transfer 
of  these  funds  from  the  stock  exchange  to  the  government 
will  assuredly  not  lead  to  inflation.  Rather,  the  contrary 
would  be  the  case. 

(b)  From  the  surplus  of  current  production.  The  annual 
surplus  products  of  a  community  are  ordinarily  converted  into 
productive  capital  through  new  investment.  If  these  invest- 
ments are  turned  into  the  channel  of  government  bonds  in- 
stead of  industrials,  there  is  no  tendency  to  inflation. 

(c)  From  a  change  of  investment.  If  investors  are  tempted  to 
sell  their  foreign  securities  and  to  buy  governments  bonds,  there 
is  again  no  tendency  to  inflation.  If  they  sell  their  domestic 
industrial  securities  in  order  to  invest  in  government  bonds, 
there  will  even  be  a  tendency  to  the  contrary.  For  the  throw- 
ing of  so  many  domestic  securities  on  the  market  will  be  likely 
to  reduce  their  value— leading  to  lower,  rather  than  higher 
prices.  ' 


!l 


I! 


>\ 


'\ 


1l 


740 


ESSAYS  IN  TAXATION 


(d)  From  anticipated  savings.  Many  a  citizen  of  moderate 
means  will  invest  in  war  bonds,  paying  for  them  by  the  fractional 
certificates  which  he  laboriously  purchases  out  of  the  savings 
due  to  decreased  consumption  or  increased  production.  This 
will  lead  not  to  inflation,  but  to  the  reverse. 
"  (e)  From  borrowing  at  the  bank.  It  is  only  in  this  case 
when  the  investor  pays  for  his  war  bonds  by  borrowing  from 
the  bank,  or  when  the  bank  itself  subscribes  to  the  war  loans, 
that  the  undue  extension  of  credit  by  the  bank  may  lead  to 
inflation.  This  is  in  fact  the  most  common  way,  apart  from  the 
issue  of  paper  money,  in  which  inflation  occurs. 

What  we  are  considering,  however,  is  primarily  not  whether 
loans  may  cause  inflation,  but  whether  inflation  is  necessarily 
the  consequence  of  loans  or  whether  there  is  anything  peculiarly 
distinctive  about  loans  in  causing  inflation.  These  considera- 
tions have  ahnost  entirely  been  overlooked  in  the  discussion. 

In  the  first  place,  there  is  no  doubt  that  wars  are  always  at- 
tended by  inflation.  But  this  inflation  would  ensue  entirely 
apart  from  loans.  The  chief  factors  which  explain  the  rise  of 
prices  during  a  war  are  the  vastly  augmented  demands  of  the 
government,  the  dislocation  of  production  coupled  with  the 
falling  off  in  the  social  output,  and  the  augmented  supply  of 
the  currency.  These  are  the  fundamental  causes  which  make 
for  inflation  and  they  will  exert  their  effect  irrespective  of  the 
choice  between  loans  and  taxes.  ^ 

In  the  second  place,  it  is  a  fallacy  to  suppose  that  if  loans 
lead  to  inflation  taxes  will  prevent  inflation.  Modem  war  taxes 
are  to  an  overwhelming  extent  levied  on  business.  The  dis- 
tinguishing features  of  our  recent  system,  for  instance,  were  the 
high  corporate  income  and  excess-profits  taxes.  It  is  familiar 
to  those  acquainted  with  business  conditions  that  many  cor- 
porations whose  profits  were  largely  on  paper,  whose  resources 
were  heavily  engaged,  and  who  were  anxious  to  utilize  their 
profits  in  extending  their  operations,  were  even  in  the  early  stages 
of  the  war  preparing  to  borrow  on  a  large  scale  from  the  banks 

^  Cf.  the  recent  weighty  utterance  of  former  Assistant  Secretary  of  the 
Treasury,  R.  C.  Leffingwell,  "The  world  had  been  living  beyond  its  in- 
come living  to  some  extent  upon  its  accumulation  of  wealth.  This  would 
have  meant  inflation  even  if  the  whole  cost  of  the  war  had  been  met 
from  current  taxes,  for  the  money  to  pay  taxes  could  only  have  been 
had  by  expanding  credit  to  the  extent  that  war  expenditures  exceeded  the 
net  income  of  the  people."  Introduction  to  E.  L.  Bogar^  War  Ccsts  and 
Their  Financing,  New  York,  1921,  p.  xvii. 


LOANS  m.   TAXES  IN  WAR  FINANCE 


741 


or  to  issue  short-time  notes  in  order  to  pay  their  taxes.  Were 
a  war  financed  entirely,  or  to  a  large  extent,  by  taxes  instead 
of  by  loans,  this  resort  to  bank  credit  on  the  part  of  prudently 
managed  enterprises  would  be  still  further  emphasized.  There  is 
consequently  less  difference  than  is  commonly  supposed  between 
a  resort  to  loans  and  a  resort  to  taxes.  Some  of  the  funds  are 
almost  inevitably  borrowed  from  the  banks  in  each  case;  and  it 
is  by  no  means  certain  that  the  borrowing  is  likely  to  be  far 
more  marked  in  the  case  of  great  loans  than  in  the  case  of  very 
high  taxation.^ 

Finally  it  must  not  be  forgotten  that  if  there  were  no  loans,  or 
even  insignificant  loans,  the  tax  system  would,  in  all  probabil- 
ity, not  only  be  excessive  in  its  burdensomeness,  but,  as  we 
shall  see,  inadequate  in  its  yield.  With  a  failure  of  war  taxation 
to  defray  expenditures  the  ultimate  resort  would  then  nec- 
"gssarily  be  to  fiat  money  or  inconvertible  paper  which,  as 
everyone  concedes,  causes  far  greater  inflation  than  anything 
else.  Thus  the  failure  to  resort  to  loans  in  proper  amount 
would  almost  inevitably,  in  a  protracted  contest,  lead  to  the 
worst  possible  kind  of  inflation. 


Ls  it  not  clear  then  that  the  relation  between  loans  and  in- 
flation must  not  be  exaggerated?  Loans  may  indeed  lead  to 
inflation,  but  so  may  taxes  lead  to  inflation;  inflation  is  due 
primarily  to  other  and  more  fundamental  causes  than  either 
loans  or  taxes;  and  the  attempt  to  avoid  inflation  by  abandoning 
the  use  of  loans  will  almost  inevitably  lead  to  far  greater  in- 
flation  in  the  end. 

If,  then,  there  is  little  reason  for  anticipating  (1)  any  serious 
abuse  of  public  credit,  or  (2)  a  fundamental  and  unfortunate 
change  in  the  tax  system  after  the  war,  or  (3)  any  undue  or 
peculiar  tendency  to  inflation  as,  a  result  of  loans,  it  follows 
that  a  proper  use  of  public  credit  may  be  of  net  advantage  to 
society. 

V.  The  Comparative  Merits  of  Taxes 

Up  to  this  point  we  have  adverted  to  the  advantages  and 
disadvantages  of  loans  and  by  implication  have  considered 

^  It  is  significant  that  Professor  Pigou,  who  was  the  first  to  i3ut  forward 
the  inflation  theory  in  war  finance  is  careful  not  to  limit  this  eventuality  to 
loans.  "If,  as  is  probable  in  the  case  of  very  large  levies,  their  (the  rich) 
borrowings  for  war  loans  and  war  taxes  exceed  their  nonnal  borrowings  in 
times  of  peace,  there  is  likely  to  occur  a  certain  amount  of  currency  infla- 
tion."   The  Economy  and  Finance  of  the  War,  1916,  p.  76. 


H! 


',  t 


742 


ESSAYS  IN  TAXATION 


some  of  the  advantages  and  disadvantages  of  taxation.  It 
may  conduce,  however,  to  clarity  of  exposition  to  marshal  here 
some  of  the  arguments  which  refer  particularly  to  taxes. 

The  first  advantage  of  war  taxation  is  its  effect  upon  consump- 
tion^ As  we  pointed  out  at  the  beginning,  the  important  point 
m  the  economic  hfe  of  a  conmiunity  at  war,  as  in  peace,  is  to 
have  a  surplus  of  current  production.  This  surplus  must  be 
measured  in  terms  not  simply  of  material  output,  but  also  of 
subjective  sacrifices.  The  outstanding  fact  in  every  great 
war  is  the  sudden  and  sharp  reduction  in  production.  Unless 
the  consumption  of  the  community  keeps  this  slower  pace  the 
result  will  be  disastrous.  For  although  the  community  can 
rely  to  a  certain  extent  upon  the  accumulations  of  the  past 
and  can  also,  as  we  have  pointed  out,  defer  some  of  the  sacrifice 
to  the  future,  a  large  part  of  the  burden  must  be  borne  at 
present.  The  current  consumption  of  the  community  must 
be  cut  down  to  the  measure  of  the  current  production  if  there 
is  to  be  any  surplus. 

The  advaiitage  of  high  war  taxes  is  that  they  may  help  to 
brmg  about  this  result.    But  while  this  is  true,  the  effects  of 
taxation  on  consumption  must  not  be  exaggerated.     In  the 
first  place  taxation  is  not  alone  in  affecting  consumption.    Con- 
sumption may  be  influenced  by  legislative  prohibition '^d 
by  rationing.    In  truth,  during  the  recent  war,  these  factore 
were  of  much  greater  influence  than  taxation.    In  the  second 
place  taxes  are  not  the  only  fiscal  expedient  which  can  affect 
consumption.    Among  the  chief  points  in  the  recent  issues  of 
war  loans,  here  as  abroad,  have  been  the  appeal  to  patriotism 
and  the  facilities  afforded  for  investment  in  the  loans,  to  be 
made  good  by  current  savings.    It  is  true  that  taxes  involve  a 
compulsory,  and  loans  only  a  voluntary,  appeal  to  saving. 
But  it  would  be  a  mistake  to  overestimate  the  influence  of  the 
former  and  to  underestimate  that  of  the  latter  in  reducing  con- 
sumption. 

In  the  third  place  the  beneficial  effects  of  taxes  upon  con- 
sumption may  be  seriously  "exaggerate^T"  If,  as  is  true,  war 
taxes  largely  assumBtheTorm  of  taxes  on  business  enterprises 
and  corporations,  there  will  be  ahnost  no  influence  upon  con- 
sumption, and  the  little  influence  exerted  on  consumption  may 
be  outweighed  by  the  possible  injurious  effects  on  production, 
thus  reducing  instead  of  enlarging  the  social  surplus.  More^ 
over,  even  as  far  as  individual  income  taxes  are  concerned,  the 


LOANS  vs.  TAXES  IN  WAR  FINANCE  743 

results  are  by  no  means  certain.  On  large  and  very  large  in- 
comes the  tax  is  not  apt  to  be  paid  out  of  current  income  at 
all.  The  ordinary  man  of  wealth  will  be  much  more  likely 
to  draw  temporarily  upon  his  capital  during  the  war  than  to 
reduce  his  personal  expenditures.  Again,  while  it  is  true  that 
very  high  taxes  on  small  or  moderate  incomes  will  check  con- 
sumption, the  danger  is  that  we  shall  cause  not  only  sacrifices, 
but  real  privation,  the  disadvantages  of  which  may  counter- 
balance the  advantages  of  a  reduced  consumption. 

While,  therefore,  high  war  taxes  may  tend  in  part  to  reduce 
consumption,  the  effects  and  beneficial  consequences  can  easily 
be  exaggerated. 

The  second  advantage  of  high  war  taxes  is  that  the  actual 
burden  in  times  of  war  is  really  less  than  it  appears  to  be.  A 
war  gives  unusual  opportunities  to  make  immense  gains  and 
the  profits  secured  by  the  war  contracts  are  apt  to  be  more 
or  less  widely  diffused  throughout  the  community  in  the  form 
of  high  wages  and  general  business  prosperity.  It  is  for  this 
reason  that  the  tax  on  war  profits,  or  on  excess  profits,  has 
everywhere  become  a  fundamental  feature  in  the  tax  program. 
In  the  second  place,  the  higher  price  level  due  to  the  inflation 
that  always  accompanies  a  war  makes  a  given  tax  a  much 
smaller  relative  burden.  Thirdly,  it  is  more  economical  to 
levy  high  taxes  during  a  war  when  the  diversion  of  current 
mcome  to  ordinary  investment  of  capital  is  relatively  small 
than  to  postpone  the  tax  until  a  time  when  the  need  of  capital 
investment  again  becomes  acute. 

These  are  the  undoubted  advantages  of  high  taxes.  But  over 
against  the  advantages  must  be  set  the  disadvantages. 

The  first  drawback  is  the  inadequacy  of  taxation  during  a 
war.  The  protagonists  of  high  taxation  seem  to  think  that 
the  entire,  or  well-nigh  the  entire,  expenditures  of  a  war  may  be 
met  from  taxation.^ 

Even  a  superficial  glance  at  the  facts  ought  to  show  the  base- 
lessness of  such  an  assumption.  We  do  not  venture  to  utilize 
here  any  figures  as  to  national  wealth  or  social  income,  because 
of  the  worthlessness  for  scientific  purposes  of  any  such  com- 

» So,  for  instance,  Professor  Durand  says:  "If  during  the  war  itself  highly 
progressive  taxes  were  levied  sufficient  to  meet  the  war  expenditures," 
op.  ciL,  p.  26.  The  same  thing  is  true  of  Professor  Sprague  and  some  other 
American  writers.  Professor  Pigou,  however,  is  much  more  cautious  in 
advocating  only  increased  revenue  from  high  taxation. 


'« 


744 


ESSAYS  IN   TAXATION 


}»! 


putations.  But  we  should  like  to  emphasize  the  fact  that  the 
limit  of  taxation  is  to  be  measured  not  by  the  social  income, 
but  by  the  social  surplus,  that  is,  the  excess  of  the  net  income 
over  the  consumption  of  the  members  of  society.  This  social 
surplus  is  very  much  less  than  is  often  represented.  In  Eng- 
land, for  instance,  where  the  tax  on  moderate  incomes  was 
soon  raised  to  25  per  cent  and  on  the  larger  incomes  to  423^ 
per  cent,  the  net  additional  receipts  from  the  income  tax 
amounted  to  about  one  billion  dollars.  Even  if  we  assume 
that  the  recipients  of  moderate  incomes  could  endure  the  pri- 
vation of  an  additional  25  per  cent  of  the  income,  thus  doubling 
the  returns;  and  if  we  further  assume  that  on  the  higher  grades 
it  would  have  been  possible  to  confiscate  the  entire  income 
beyond  a  small  minimum,  thus  doubling  or  trebling  the  revenue, 
we  should  have  as  the  conceival)le  maximum  from  the  income 
tax  in  Great  Britain  between  three  and  four  billions  of  dollars. 
Again,  if  the  excess-profits  tax  had  been  increased  from  the 
eighty  per  cent,  which  yielded  about  one  billion  dollars,  so  as  to 
take  in  all  of  the  profits,  we  would  have  another  few  hundred 
millions  income.  If,  therefore,  England  had  taxed  the  entire 
available  social  surplus  through  the  highest  possible  income  tax 
and  excess-profits  tax,  the  total  revenue  would  have  been 
absurdly  short  of  meeting  the  war  expenditures.  In  order  to 
meet  even  one-half  of  the  war  expenditures  from  taxation  it 
would  have  been  necessary  for  Great  Britain,  in  addition  to 
confiscating  incomes  and  profits,  to  impose  immense  burdens 
upon  that  part  of  accumulated  wealth  or  property  which  is 
susceptible  of  sale  abroad. 

The  figures  rmdatis  mutandis  would  be  similar  in  this  country. 
In  order  to  raise  even  one-half,  not  to  speak  of  the  total,  of  the 
nineteen  billions  that  were  asked  for  in  1918  and  of  the  still 
larger  sums  which  would  be  needed  as  the  war  progressed,  it 
would  have  been  necessary  not  only  to  take  by  taxation  most  of 
the  smaller  incomes  and  all  of  the  higher  incomes,  but  also  to 
confiscate  virtually  all  of  business  profits,  and  finally,  after 
levying  crushing  taxes  on  consumption,  to  take  such  part  of  the 
existing  private  property  of  the  United  States  as  could  find  a 
ready  market  abroad.  Even  the  mere  statement  of  such  a 
proposition  carries  its  refutation  on  the  face. 

But  if  the  inadequacy  of  sole  reliance  upon  taxation  is  patent 
there  are  also  well-founded  objections  to  levying  excessive 
taxes  even  short  of  this  impossible  total.    Taxes  may  roughly 


LOANS  vs.   TAXES  IN  WAR  FINANCE 


745 


be  divided  into  taxes  on  wealth  (income,  property  and  in- 
heritance taxes),  taxes  on  business  (taxes  on  profits,  production 
and  exchange),  and  taxes  on  consumption  (import  duties  and 
excises). 

The  chief  modern  tax  on  wealth  is  the  income  tax.  It  is  ac- 
cordmgly  entirely  proper  that  in  time  of  war  the  principal 
reliance  should  be  based  on  this  source  of  revenue  with  a  very 
much  higher  graduated  scale  of  progression  on  the  larger  in- 
comes. But  entirely  apart  from  the  extreme,  advocated  by 
some,  of  confiscating  all  incomes  over  $100,000  ^  there  are  at 
least  four  dangers  in  excessive  income  taxes. 

1.  The  administrative  difficulties  will  be  greatly  increased. 
It  is  as  true  of  the  income  tax  as  of  the  arithmetic  of  the  customs 
that  two  and  two  do  not  always  make  four.  Excessive  import 
duties  induce  smuggling;  excessive  income  taxes  engender 
evasion.  With  such  a  delicately  adjusted  machinery  as  in 
the  case  of  our  income  tax  it  is  to  be  feared  that  excessively 
high  rates  will  cause  not  only  a  disappointing  yield  but  also 
an  increasing  inequality  as  between  individual  taxpayers. 

2.  If  the  rates  are  too  high,  the  tax  may  act  like  an  excessive 
consumption  tax  and,  by  pressing  unduly  upon  the  margin  of 
comfortable  existence,  cause  great  privation. 

3.  If  levied  chiefly  upon  the  higher  incomes,  it  may  seriously 
trench  upon  the  sum  ordinarily  devoted  to  the  educational 
philanthropic  and  religious  institutions  and  thus  cause  wide- 
spread injury  to  the  immaterial  interests  of  the  community. 
This  objection  has  only  in  part  been  removed  by  the  recent 
amendment  to  our  income  tax  law. 

4.  Excessive  taxes  on  incomes  will  deplete  the  surplus  avail- 
able for  investment  and  interfere  with  the  placing  of  the  enor- 
mous loans  which  will  be  necessary  in  any  event.  It  might  be 
replied  to  this  last  argument  that  the  more  is  raised  by  taxes 
the  less  will  have  to  be  raised  by  loans.  This  does  not,  how- 
ever, meet  the  point.  For  if  the  taxes  are  so  high  as  to  dis- 
courage industry  they  will  obviously  dry  up  the  source  of  future 
incomes  and  thus  deplete  to  that  extent  the  surplus  which  would 
otherwise  be  available  for  future  loans.  Entirely  apart  from 
that  fact,  however,  high  taxes  will  interfere  with  loans  in  so 

» This  has  been  done  by  Professor  Sprague  in  his  address  before  the 
American  Economic  Association.     Papers  and  Proceedings  of  the  Twenty- 
ninth  Annual  Meeting  of  the  American  Economic  Association,  December 
1916,  p.  211.    Similar  propositions  were  made  in  Congress.  ' 


ri'if 


746 


ESSAYS  IN  TAXATION 


LOANS  vs.   TAXES  IN  WAR  FINANCE 


'47 


I 


h 


far  as  the  loans  are  financed  even  temporarily  by  the  banks. 
If  a  would-be  investor  borrows  from  a  bank,  the  amount  of 
his  credit  wil  be  ma  certain  proportion  to  his  estimated  profits. 
Every  dollar  s  diminution  of  his  prospective  income  will  cause 
several  dollars  decrease  in  the  amount  which  ho  will  think  it 
prudent  to  borrow  or  which  the  bank  will  think  it  8.afe  to  lend. 
If,  therefore,  the  income  tax  is  so  high  as  seriously  to  deplete 
his  investing  surplus,  it  will  cause  a  far  greater  falling  off  in  the 

tZZ  if  t  r  '•*'"*•'  *°  ♦*'*^  '°'^"-  It  is  significant 
that  this  IS  the  chief  argument  that  weighed  with  the  ChanceUor 

texldoif  ^         ' '"    ^^^""^  *"  '"^"^'"^  *°  "*'"■''*"''  E"s'^*» 

Excessive  taxes  on  business  again  may  have  all  manner  of  in- 

open  to  the  same  objections,  but  our  tax  on  excess  profits  is  far 
more  than  a  ax  on  war  profits.  When  they  are  too  high,  they 
tend  to  check  the  neetled  transfer  of  industry  and  of  invest- 
ment to  war  purposes  just  at  the  time  when  new  enterprise  is 
despemtely  nee<led.  Although  our  tax  could  by  no  3s  be 
called  excessive  it  is  well  known  that  in  severul  important  cases 
It  did  exert  such  a  repressive  eifect. 

The  evils  of  excessive  taxes  on  exchange  and  consumption 
are  so  famihar  that  they  need  not  be  recounted  here 

„J*nTw  r"'  ^^f^i'^'f  that  the  dange.^  of  excessive  taxes 
are  not  to  be  overlooked.  The  anti-social  consequences  of 
excessive  taxation  are  perhaps  more  to  be  emphasized  than  the 
similar  evils  of  excessive  loans.^ 

„'  ?J^V-T  ^"^  ''^•^  tWs  on  several  occasions,  the  last  time  on  Aueu-t 
13  1917  I  quite  admit  that  in  financing  the  war  the  noiremment  hTfl 
get  he  largest  amount  out  of  taxation  which  i.  compatfble  ™th  m2?^^ 
rng  the  hnanoml  security  of  the  country;  but  I  have  sai,l  mrny  t^^  ftat 
there  comes  a  limit  at  which  if  you  keep  on  inereasina- 1,  v^t  J  •  u! 

^ve  up  all  hope  of  raising  mon'^y  by  C  It TZious  that  i  you  tx 
to  such  an  extent  as  to  destroy  the  financial  nositinn  v™,  !I>  T  I  ] 
aU  hope  of  loans."  Parlia,nerZry  DetaZ.t^^'J.ZT'^l  "'"""''" 
'This  pomt  has  recently  been  emphasized  by  exierret.,rv  T«'ffi  ■■ 
m  discussing  the  p^posal  to  defray  all  the  war  c"  rs  o^  'of  ^^I'^f^ 
Congress  had  pas*d  such  a  tax  law,  it  is  not  difficult  to  ^eTttat  the 
consequence  would  have  been  a  business  catastrophe  whioh^^uld  h,™ 
put  us  effectively  out  of  the  war  .  .     one  thine  i^X,r   .1  ♦  V  ■ 

"^zrz  ';:t^'  "i^  ''"' »'«"'  -""« ^-r  ulrXtcy'wSr 

paired  and  the  harm  done.    In  war  timp  it  wn„iri  k«  •  ."f^  ^^  "»" 

the  injury  done  by  a  tax  levy  whrch^rtta?"^^^^^^^^ 

E.  L.  Bogart,  War  Costs  and  Their  Financing,  1921,  p.  xix.    "''^"'''*^  ^ 


It  is  important,  moreover,  that  the  public  mind  should  be  in- 
formed not  only  as  to  the  dangers  of  excessive  taxation,  but 
also  as  to  the  inevitable  failure  of  exclusive  reliance  upon  any 
single  group  of  taxes.  It  would  have  been  in  the  highest  degree 
unfortunate  if  through  emphasis  upon  such  slogans  as  ''  conscrip- 
tion of  wealth"  and  the  like,  the  general  citizen  body  had  ac- 
quired the  feeling  that  war  taxation  meant  immunity  for  them- 
selves. Just  as  a  war  from  a  military  point  of  view  can  be  won 
only  by  putting  forth  the  united  efforts  of  the  nation,  so  a  war 
can  be  won  from  the  fiscal  point  of  view  only  by  reUance  upon 
the  abiUty  of  the  entire  citizen  body,  whether  rich  or  poor. 

VI.  Conclusions 

The  conclusions  from  the  above  analysis  are  as  follows: 

1.  Government  loans  are  indispensable  to  a  sound  war 
finance.  If  properly  used,  they  tend  to  lighten  the  burden  of 
a  war. 

2.  To  attempt  to  finance  a  war  exclusively  through  loans  is 
short-sighted. 

3.  To  attempt  to  finance  a  war  exclusively  through  taxes  is 
suicidal. 

4.  War  taxes  should  be  large  and  immediate,  but  should  never 
be  stretched  beyond  the  point  where  they  begin  to  lessen  the 
social  output,  to  hamper  the  transfer  of  pre-war  to  war  pro- 
duction, or  to  press  unduly  on  desirable  consumption. 

5.  War  taxes  must  be  high  enough  to  assure  a  solid  founda- 
tion for  the  loans  and  to  ensure  a  rapid  payment  of  the  debt 
within  a  relatively  short  time. 

6.  At  the  outbreak  of  a  war,  and  during  the  early  period,  very 
much  greater  sums  ought  to  be  raised  by  loans  than  by  taxes. 

7.  As  the  war  proceeds  a  continuously  larger  amount  can  and 
should  be  raised  by  taxation,  although  at  no  time  will  the 
government  be  free  from  the  necessity  of  relying  to  a  con- 
siderable extent  upon  the  use  of  public  credit. 


v^ 


CHAPTER  XXIV 

THE  COST  OF  THE  WAR  AND  HOW  IT  WAS  MET  * 

hl^Z^^lt^  '"''^  ^t  '^""^  ^^'  ^  ^""^^  Statement  of  the  fiscal 
history  of  the  war  For  one  thing,  the  figures  are  not  yet 
completey  available;  and,  in  the  next  place,  the  expenses 
connected  with  the  war  are  not  yet  over.  It  is,  however  no 
premature  one  year  after  the  declaration  of  the  aimistice, 
to  attempt  to  present  m  a  summary  fashion  a  preHminary  sur- 
vey and  mterpretation  of  the  facts.     Various  ad  interim  en- 

Ermad^'e?'^'^''^  ''^'^^"'  ^^'''^'  ""^  *^^  '"^^^'^  ^^^"^  ^^'^^^^ 

■  This  chapter  is  reprinted,  with  a  few  changes,  from  the  article  in  Th^ 
American  Economic  Review,  vol.  xix  (1919).  ^ 

i.  \l\^^^^'^''^'''^f\^^}'^^^  for  the  eariier  period  of  the  war  wiU  be  found 
m  the  buUeuns  of  the  Copenhagen  War  Study  Society  and  oTihe  S 
^  Bangm  Suzsse.    Some  later  figures  will  be  found  in  L.  P    lyres    rt 

win  k!  f  ^^'^^.'"^^«"'  1?,19-  Some  computations  as  to  the  cost  of  the  war 
w,l  be  found  m  Edgar  Crammond's  Address  on  the  Cost  of  the  War  bef oreX 

Ci^v  ?nH  Mi  n  t  f  ^'''  '''''^  ''*'  ^"^'^'^^'^^  '"  *^*«  ^eP«rt  to  the  London 
City  and  Midland  Bank,  January,  1919.    Facts  as  to  public  debts  will  be 

NeTVo\'^'f91^^^^^^^^^  r  /^^^^'r^  ^"^  ^^^^'^«  ^^^^'-^  «-' 

tioTal  Pit;  rlH'  ^^lJ/^''tJ^'^  ^'^  «/  Belligerent  Countries  (Na- 
tional City  Company,  1918).     The  most  painstaking  collection  of  facts 

it  ^*^^^?^"^P^K*^y  «««  «^  W  former  students  L.  R  Gottlieb  and  nub- 
hshed  with  variations  in  three  separate  places.  The  first  w".  an  arUct 
on  The  Indebtedness  of  the  Principal  BeUigerents"  in  the  oZtlrh 
Journal  of  Economics,  May,  1919.  The  second  wa^  the  booklet  e^tm^ 
SrwT^k^^To^-^  t''^-f'  relished  by  the  B.nl!^  T::^toZX 
pTIw  h'  '  ""''^^  f"  introduction  by  myself.  The  third  wa^  entitled 
Post-War  Finance,  and  International  Finance  in  its  Post-War  Asmct^Zt 
hshed  by  tlio  Bankers  Statistics  Corporation,  New  York   in  tS  iri^A-t 

Iheir  tmancing.    A  Uitdy  of  the  Financing  of  the  War  and  the  After-War 

mentTr  fho  t  "."'  ''-^^^^-^^-^  York,  1921.  The  most  valuable  docu- 
ment for  the  earlier  period  of  the  war  is  the  rei>ort.  No.  4133  to  the 
French  Chamber  of  Deputies,  by  M.  Louis  Marin  in  1917.  By  kl  odds 
the  most  complete  and  valuable  studies  on  the  subject  are  tho.^  by  ?rol 

vols,  xiv.-xvm.     He  has  dealt  particularly  with  England,  France.  Italv 

748 


CO&T  OF  THE  WAR  AND  HOW  IT  WAS  MET     749 


The  problems  to  which  it  is  desired  here  to  call  attention  are 
as  follows.  First,  what  is  meant  by  the  cost  of  war?  Secondly, 
in  considering  actual  governmental  outlays,  is  it  desirable  to 
distinguish  between  the  expenditures  during  the  war  and  war 
expenditures?  And,  if  the  answer  be  in  the  affirmative,  how  are 
the  latter  facts  to  be  ascertained?  Third,  from  what  sources 
were  the  actual  war  outlays  derived?  This  introduces  the  ques- 
tion of  taxes  versus  loans.  The  facts  as  to  taxation  are  first  to 
be  secured.  Here  it  will  be  seen  that  there  is  considerable  con- 
fusion as  to  what  is  meant  by  war  taxes,  and  that,  just  as  there 
has  been  a  failure  to  distinguish  between  expenditures  of  the  war 
period  and  war  expenditures,  so  the  proper  line  has  not  been 
drawn  between  taxation  during  the  war  and  war  taxation.  A 
correct  interpretation  of  the  facts  will  yield  some  rather  unex- 
pected results.  The  fourth  problem  is  that  of  the  relative 
weight  attached  by  different  countries  to  the  various  categories 
of  taxation  in  raising  the  necessary  revenues.  Finally,  we  have 
to  consider  the  role  played  by  public  debts  and  the  relative 
importance  attached  to  long-time  and  short-period  borrowings. 

In  order  to  put  the  results  in  the  most  compact  form,  a  series 
of  tables  have  been  constructed.  The  figures  throughout  this 
have  been  taken  from  oflicial  sources;  ^  and  the  foreign  curren- 

and  Germany  in  three  series  of  articles  entitled  respectively  "Les  Finances 
de  Guerre,"  "Les  Mdthodes  Financi^res,"  et  "Les  Emprunts  de  Guerre." 
Most  of  these  studies  were  reproduced  in  the  three  volumes  entitled  Les 
finances  de  gmrre  de  VAnglcterre,  1919;  Les  Finances  de  guerre  de  la  France, 
1920;  and  Les  finance  de  guerre  de  V Italic,  1920. 

^  The  official  sources  that  have  been  utilized  are  as  follows: 

Greai  Britain:  The  various  speeches,  as  found  in  Hansard,  of  the  chancel- 
lor of  the  exchequer  (Lloyd  George,  1914-15;  McKenna,  1915-1916; 
Bonar  Law,  1917-1918;  and  Austen  Chamberlain,  1919,— the  last  being 
his  speeches  of  May  and  June,  1919)  and  of  the  Prime  Ministers  (Asquitli 
and  Lloyd  George);  the  Anniuil  Finance  Accounts;  the  Reports  of  H.  M. 
Inland  Revenue;  and  the  Return  relating  to  the  National  Debt  from  1875  on 
(cd.  8972,  1918). 

France:  The  annual  reports  {Rapports  generaux)  of  the  Budget  Com- 
mission; the  Expose  des  motifs  du  projet  de  loi  for  each  of  the  new  revenue 
laws;  and  the  speeches  in  the  Chamber  of  Deputies  of  the  Ministers  of 
Finance  (Ribot,  1915-16;  Klotz,  1917-19,— the  last  being  the  speech  of 
May  27,  1919). 

Italy:  The  reports  (Relazioni)  and  speeches  of  the  Ministers  of  the  Treas- 
ury (Carcano,  1916-17;  Nitti,  1917-18;  Stringher,  1919;  Schanzer,  1919, 
—the  last  being  the  speech  of  July,  1919)  as  well  as  the  studies  of  Pro- 
fessors Flora,  Cabiati  and  Einaudi. 

Germany:  The  Reichstag  speeches  of  the  Ministers  of  Finance  (Kuhn, 


II 


750 


ESSAYS  IN  TAXATION 


cies  have  been  converted  into  dollars  according  to  a  scale  which 
represents  their  actual  pre-war  coin  value.'   Owing  to  the  depr^ 

«^~«!  ^    7^  currencies,  this  naturally  gives  a  somewhat 
exaggerated  picture  of  the  existing  burdens. 


,  '.  +■!!■ 

It 


I.  The  Expenditures 

The  cost  of  the  war  may  mean  several  different  things     In 
the  narrower  sense,  it  means  the  actual  money  outlay,  or  ex- 

tT »"'%'"  ,t "'*':«, '^°<1  "^ent^-  directly  involved  in  prosecuting 
the  war.    In  the  wider  sense  it  includes  many  items,  both  direct 

^vi^w  't  '       f  T  f  ^'S»'fi«^°«e  f™""  the  economic  point 
of  view.    The  real  cost  of  the  war  in  this  .sense  may  mean  either 
the  actual  loss  of  lives  and  of  property  or  the  diminution  of 
the  annual  social  output.    The  direct  loss  of  property  is  sus- 
ceptible of  fairly  accurate  measure;  the  cost  due  to  the  loss  5 
hvesis  more  difficult  to  estimate.    Most  of  the  calculations  on 
the  latter  pomt  have  been  entirely  arbitrary.    So  far  as  the 
^„  L  K^  Tr**^  IS  measured  by  its  social  income  it  may  be 
reduced  by  the  actual  loss  of  territory,  as  in  Germany  and 
Austna;  by  the  impairment  of  its  natural  resources  such  as  coal 
mines  and  forests,  as  in  France;  by  the  reduction  of  labor 
f^r""'    1".!      -^y  "'ounded  workmen  or  the  results  of  starva- 
tion on  the  civilian  population,  as  in  most  of  the  European 

rtt":^ '  nH  ''^  **■;  r  °'  ''=°"°r  «'««'<'"'=y  ^ue  to  a  lowering 
of  the  standard  of  life  or  to  a  change  in  the  attitude  toward 

^h^rL^""^-   7*>\t°*^'  ""^ts  of  a  war  in  this  sense,  al- 
though they  are  for  the  most  part  incalculable,  are  none  the 
less  of  profound  significance. 
In  this  chapter  we  shall  attempt  to  deal  only  with  the  direct 

TdirfL   '^'''"  'n'  "°"^^  '^°«*^  -  govemmenta   S 
penditures  for  war  mclude  not  only  the  actual  outlays  for 

T^!^;""T'^-  The  reports  of  the  Budget  Commissions. 
Translation  of  some  of  these  reports  wiU  be  found  in  the  Bulletin  de 
StaM^ue  The  Economist  and  L'Sconmnule  Europien. 
lf«^f^,Q,       .  lruble=51.5  cents. 

J^wl^^v"*".  1  crown =20.3  cents. 

1  mark  =  23.8  cents.  1  £  T = $4.40. 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     751 

military  and  naval  purposes  but  also  the  whole  range  of  ex- 
penditures incurred  in  industrial  life  to  prepare  the  where- 
withal for  the  army  and  navy;  and  they  also  comprise  the  sums 
devoted  to  the  maintenance  of  the  families  of  the  soldiers.  All 
these  items  are  far  greater  in  modem  times  than  they  used  to 
be.  It  is  a  far  cry  from  the  meeting  of  two  savage  tribes  armed 
with  bows  and  arrows  or  javelins  to  the  modern  sixteen-inch 
guns,  the  dreadnoughts,  the  aeroplanes,  the  submarines,  the 
poison  gas,  and  the  innumerable  technical  adjuncts  of  modern 
warfare.  The  consequence  is  that  the  money  costs  of  the 
Great  War  far  transcended  those  of  all  previous  conflicts. 

The  attempt  to  present  in  figures  the  cost  of  the  war  even  in 
this  restricted  sense  meets  with  several  difficulties.     In  the 
first  place,  the  question  arises  as  to  the  period  when  we  ought 
to  stop.    In  one  sense  the  war  ceased  when  the  armistice  was 
declared:  in  another  sense  the  war  did  not  actually  stop  until 
peace  was  ratified.    But  even  when  peace  was  made,  the  war  ex- 
penditures were  by  no  means  over.    The  process  of  demobiliza- 
tion was  a  slow  one  and  in  many  countries  there  have  been  con- 
siderable demobiUzation  bonuses.    Moreover,  it  was  necessary 
to  continue  for  some  time  the  policing  of  the  conquered  coun- 
tries.    Again,  we  must  take  account  of  the  compensation  to 
citizens  for  war  damages;  of  the  expenses  of  reconstruction; 
and  of  the  loss  on  exchange  of  the  depreciated  currencies. 
Finally  comes  the  question  of  the  pensions  to  the  wounded 
soldiers  or  to  the  families  of  the  dead.    It  will  be  seen,  there- 
fore, how  impossible  it  is  to  state  with  any  accuracy  at  the 
present  time  the  costs  of  the  war,  while  these  are  still  being 
incurred.    The  best  plan  has  seemed  to  include  in  the  war  costs 
the  period  of  from  six  months  to  a  year  (according  to  the  dates 
of  the  expiration  of  the  various  budgets)  after  the  final  cessa- 
tion of  hostilities,  i.  e.,  from  March  to  October,  1919.    But  this 
of  course  renders  the  figures  only  approximate.    Furthermore, 
the  figures  ordinarily  given  contain  many  inaccuracies.     The 
richer  countries  made  advances  to  the  poorer  countries,  and 
these  expenditures  are  sometimes  counted  twice  in  the  total — 
a  procedure  legitimate  only  on  the  assumption  that  the  loans 
will  not  be  repaid.    Again,  in  a  country  like  the  United  States, 
which  has  substituted  an  insurance  system  for  pensions,  the 
nominal  expenditures  appear  smaller  than  is  really  the  case, 
because  of  the  receipt  of  vast  insurance  premiums  which  will 
ultimately  all  be  expended  again.    Finally,  the  figures  make  no 


752 


ESSAYS  IN  TAXATION 


Srpv«?n  V  '^^"r  ^^  '^'  P"^^  ^^^^'  «^  ^he  alteration 
in  the  value  of  money.    In  a  great  war  like  the  one  just  finished 

prices  always  rise;  in  some  countries  they  have  doubled,  in  some 

they  have  more  than  trebled,  for  reasons  which  it  is  needless 

to  discuss  here.     What  seems,  therefore,  to  be  an  increasfng 

After  making  allowance  for  these  difficulties,  we  may  pro- 
co^tries  ^*^  '""""^  ""^  *^^  ^^'*' """  ^"^  *^^  ^'^''^^  ''"*^^^'  ^^  ^^'•^^"s 
The  first  point  of  interest  is  the  average  daily  expenditure  for 
war  purposes.    In  all  the  belligerent  countries  it  naturally  took 
some  tinie  for  them  to  get  into  their  stride.    This  is  especiallv 
true  of  Great  Britam.     The  figures  of  the  average  daily  ex^ 
penditures,  as  given  by  the  chancellors  of  the  exchequer,  amount 
to  almost  ten  million  dollars  for  the  opening  months  of  the 
hv'im«   '"^f^  \^^  maximum  of  almost  thirty-six  millions 
by  1918     These  stupendous  figures,  however,  are  somewhat 
exaggerated,    because   no    distinction   is   made   between    ex- 
penditures m  the  war  and  expenditures  for  the  war.    In  order 
to  ascertain  the  real  war  expenditures  in  any  country    it  is 
obvious  that  we  must  deduct  the  amount  of  ordinarv  or  peace 
expenditures.    This  it  is  not  always  easy  to  do.    In  the  first 
place,  peace  expenditures  themselves  tend  to  grow  from  year 
to  year.    If  therefore,  we  take  as  a  criterion  the  ordinarv  ex- 
penditures for  the  year  preceding  the  war,  this  sum  ought  ex- 
pecially  m  a  long  war,  to  be  somewhat  increased  from  year  to 
year.    In  the  second  place,  the  expenditures  prior  to  the  war 
may  sometimes  include  preparations  for  an  impending  war  and 
should  therefore  be  reduced  accordingly.    Since,  however,  it  is 
impracticable  to  make  these  detailed  corrections  in  every  case 
It  will  suffice  to  deduct  from  the  expenditures  of  each  war  year 
the  amount  of  the  expenditures  in  the  last  year  of  peace,  even 
though  this  tends  slightly  to  exaggerate  the  real  money  cost 
ot  the  war.    Making  these  corrections,  it  appears  from  Table  A 
that  the  average  daily  war  expenditures  in  Great  Britain  grew 
from  9H  million  dollars  during  the  first  eight  months  of  the 
war  to  33K  millions  in  1918  and  then  slowly  receded      In 
France  the  average  daily  expenditures,  as  was  to  be  expected 
were  somewhat  less,  rising  from  about  8^  million  dollars  during 
the  first  three  months  of  war  to  over  21  millions  during  1917 
the  la^t  full  year  of  war.    In  Germany  the  daily  expenditures 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     753 

were  approximately  the  same  as  in  Great  Britain,  rising  from 
about  13  million  dollars  in  the  first  nine  months  of  the  war  to 
about  341^  millions  during  the  last  half  of  1918.    In  the  case 
of  both  Germany,  and  France,  however,  it  is  not  known  whether 
the  figures  comprise  the  total  expenditures  or  only  the  purely 
war  expenditures.    In  the  former  event,  the  daily  expenditures 
of  Germany  would  be  a  little  less  than  those  of  Great  Britain; 
in  the  latter,  they  would  be  a  little  more.    In  Italy  and  Aastria,' 
the  daily  expenditures  were  naturally  smaller,  amounting  as  a 
maximum  to  10^  and  20  millions  respectively.    In  Russia  the 
daily  expenditures  rose  in  1916  to  21  millions,  and  in  1917,  just 
prior  to  the  October  revolution,   nominally  to  47  millions. 
Owing  to  the  great  depreciation  of  the  ruble,  however,  the 
actual  expenditures  were  much  less.     The   salient  facts   are 
given  in  Table  A. 


Table  A.— Average  Daily  War  Expenditures 

(In  millions) 
Great  Britain 


Average  daily 
total  expenditures 


Aug.    4,  1914— Mar.  30,  191.5 
Apr.     1,  1915—        "       1916 

1916—  ''   1917 

1917—  "   1918 
1918— Nov.  9,  1918 

(Armistice) 
Nov.  10,  1918— Mar.  30,  1919  6.47 


it 


it 


7.44 


£ 
2.05 
4.27 
6.02 
7.39 


Average  daily 
war  expenditures  * 


9.98 
20.79 
29.33 
35.97 


7.07      34.43 


£ 
1.98 
3.73 
5.48 
6.85 


9.46 
18.16 
26.69 
33.36 


6.52       31.75 


France 


Average  monthly 
war  expenditures 


Aug.  3— Dec.  31,  1914 
Jan.    1— Dec.  31,  1915 

1916 
1917 


fr. 

S 

1,318 

254 

1,900 

367 

2,743 

529 

3,360 

648 

Average  daily 
war  expenditures 


439.6 

633.3 

914.3 

1,120.0 


$ 

8.5 
12.2 
17.6 
32.4 


»  Arrived  at  by  deducting  the  expenditures  for  the  year  1913-1914  (£l97 
millions)  from  the  total  expenditures. 


754 


ESSAYS  IN  TAXATION 


Germany 


«»l 


Aug. 
July 


ti 


tf 


1,  1914— June  30,  1915 
1,  1915—        "       1916 

1916-  "       1917 

1917—  "       1918 
1918— Dec.  31,  1918 


Average  monthly 
war  expenditures 


Mk. 

1,675 
2,008 
2,867 
3,908 
4,358 


S 
398.6 
461.8 
682.2 
930.1 
1,037.2 


Average  daily 
war  expenditures 


Mk. 
55.8 
66.9 
95.6 
130.3 
145.2 


13.3 

15.9 

22.7 

31. 

34.5 


Italy 


July     1,  1915— June  30,  1916 

"        1916-        -       1917 

1917—        "       1918 

1918— Oct.   31,  1918 


ii 


Annual  expenditure.s  ^ 

Average  daily 

expenditures 

li 

$ 

$ 

3,351 

1,612 

4.4 

14,132 

2,727 

7.5 

19,734 

3,808 

10.4 

9,726 

1,977 

6.5 

RUS.SIA 


Aug.     1,  1914— Dec.  31,  1914 
Jan.     1,         —        "       1915 

—        "       1916 
—Oct.   30,  1917 


It 

u 


Annual  war 
expenditures 


Average  daily 
war  expenditures 


ru.  s 

1,703  877 

9,194         4,735 

15,372         7,916 

25,231  12,993 


$ 

5.8 

12.9 

21.6 

47.0 


Austria-Hungary  » 


July  28,  1914— June  30,  1915 
July     1,  1915—        "       1916 

1916—  "   1917 

1917—  "   1918 


(1 


Annual  war 
expenditures 


10,706 
15,726 

18,788 
22,170 


2,714 
3,192 
3,812 
4,500 


Average  daily 
war  expenditures 


# 

6.4 

8.7 

10.4 

12.3 


When  the  United  States  entered  the  war,  the  scale  of  opera- 
tions became  so  gigantic  that  the  daily  war  expenditures  soon 
far  exceeded  those  of  any  other  belligerent.  In  the  second 
month  of  the  war  the  average  daily  expenditures  for  war  pur- 
poses reached  15  million  dollars,  and  a  little  over  a  year  later 

>  Not  including  payments  abroad. 

2  The  figures  for  Hungary  are  not  available;  but  as  the  total  e.xpendi- 
tures  of  Hungary  during  the  four  years  were  about  one-third  of  those  of 
Austria,  it  is  safe  to  add  that  proportion  to  the  Austrian  expenditures  in 
order  to  ascertam  the  average  daily  war  expenditures  of  Austria-Hungary 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     755 

they  had  risen  to  almost  50  millions.  By  the  end  of  1918  as 
appears  from  Table  B  on  the  following  page,  the  daily  average 
war  expenditures  attained  the  staggering  sum  of  643^^  milhon 
dollars,  almost  double  those  of  Great  Britain  and  far  exceeding 
those  of  any  other  belligerent. 

We  come  next  to  the  total  cost  of  the  war.    In  attempting  to 
present  the  comparative  statistics  on  this  point,  we  must  be 
mmdful  of  the  difficulties  adverted  to  above.    The  figures  are 
not  quite  accurate  and  cannot  be  made  entirely  accurate  for 
several  reasons.    In  the  first  place,  the  last  date  in  the  official 
return  differs  from  country  to  country.    The  dates  are,  however 
all  subsequent  to  the  armistice,  with  the  exception  of  Russia' 
where  we  have  no  trustworthy  figures  after  the  October  revo^ 
lution  m  1917.    In  the  second  place,  we  do  not  know,  except 
m  the  case  of  the  United  States  and  Great  Britain,  whether  the 
figures  comprise  the  total  expenditures  or  only  the  purely  war 
expenditures.    Even  in  the  case  of  the  United  States  the  official 
figures  are  not  quite  accurate,  as  will  be  seen  below.^    More- 
over, in  the  case  of  Japan  as  well  as  some  of  the  minor  belliger- 
ents, no  figures  are  included  because  the  war  expenditures  were 
either  virtually  non-existent  or  of  an  exceedingly  insignificant 
amount. 

Making  allowance  for  these  points,  it  will  be  seen  from  Table  C 
that  the  total  war  expenditures  amount  to  about  232  billion  dol- 
lars. From  this  sum,  however,  must  be  deducted  the  amounts 
counted  twice,  because  advanced  to  their  allies  by  the  United 
States,  Great  Britain,  France  and  Germany,  aggregating  a 
httle  over  21  billions.  This  would  bring  the  actual  net  war 
expenses  to  over  210  billion  dollars.^  Inasmuch,  however,  as 
most  of  the  countries  will  continue,  for  some  little  time  in  'the 
future,  to  have  expenditures  attributable  to  the  war,  it  is 
probable  that  the  total  v/ar  expenditures  will,  by  the  end 
of  1920,  amount  to  over  236  billions,  or,  deducting  the  advances 
to  allies,  to  a  little  less  than  215  billions.  This  may  be  accepted 
as  a  fairly  accurate  statement  of  the  real  money  cost  of  the  war.^ 

1  Infra,  p.  763,  note  to  Table  H. 

«  For  France  we  have  taken  the  total  five-year  expenditures  as  stated  bv 
Minister  Klotz  in  1919  (192  billion  francs)  and  have  deducted  23  biUions 
as  representing  the  peace  expenditures  for  the  four  and  a  half  year  period' 
thus  leaving  a  remainder  of  169  billion  francs  or  313^  biUion  dollars 

» These  figures  are  considerably  larger  than  those  given  by  Ayres  and 
other  writers.  But  none  of  these  authors  uses  the  later,  and  much  aug- 
mented, official  figures  for  France,  Italy,  and  especially  Germany 


il'l 


756 


ESSAYS  IN  TAXATION 

Table  B.— Expenditures  op  the  United  States 

(In  millions) 


Period 


1917: 


Apr.  6-30 

May 

June 


Total,  Apr.  6-June  30 
July 
August 
September 
October 
November 
December 
1918:  January 
February 
March 
April 
May 
June 


Total,  fiscal  year  1918 
1918:  July 

August 

September 

October 

November 

December 
1919:  January 

February 

March 

April 

May 

June 

Total,  fiscal  year  1919 

Total,  Apr.  6,  1917- 
June  30,  1919 


Monthly  expendi- 
tures exclusive  of 
the  principal  of 
the  public  debt 
and  of  postal 
expenditures 


$279 
527 
410 


662 

757 

746 

944 

986 

1,105 

1,090 

1,012 

1,156 

1,215 

1,508 

1,512 


$  1,216 


1,608 
1,805 
1,557 
1,665 
1,935 
2,061 
1,962 
1,189 
1,379 
1,429 
1,112 
809 


$12,697 


$18,505 


$32,428 


Monthly 
war 
expenditures  • 


$219 
467 
350 


Average 

daily  war 

expenditures 


602 

697 

686 

884 

926 

1,045 

1,030 

952 

1,096 

1,155 

1,448 

1,452 


$  1,156 


$  8.0 
15.0 
11.7 


19.4 
22.5 
22.9 
29.5 
30.9 


7 
2 


1,548 
1,745 
1,497 
1,605 
1,875 
2,001 
1,902 
1,129 
1,319 
1,369 
1,052 
749 


$11,977 


$17,785 


$30,918 


33 

33 

34.0 

35.9 

38.5 

46.7 

48.4 


49.9 
56.8 
49.9 
51.8 
62.5 
64.5 
61.4 
40.0 
42.5 
45.6 
33.9 
24.9 


f  .r  IQ^tTq^R  ^  deducting  one-twelfth  of  the  annual  (peace)  expenditures 
987  f.^         ^"'rn^'^'Z''^  P^"^^'^  expenditures:  i.  e.,  one-twelfth  of  $1,008- 
287  millions  =  (,0  millions.    Secretary  Glass  in  his  Letter  of  JtUy  9   1919 
IIa,  Z  %  ^^'  (^ommitiee  on  Ways  and  Means  excludes  postal  ex^ 

penditures  m  the  first  column,  but  fails  to  exclude  them  when  malring  the 
nf  «To  1^7  .r^"'  expenditures.  He  consequently  arrives  at  the  figure 
of  $30,177  millions  as  the  cost  of  the  war.  The  total  of  $30,918  millions 
given  above  does  not,  however,  represent  accurately  the  war  expenditures, 
as  the  figures  are  based  on  the  provisional  daily  treasury  statements  used 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     757 

The  figures,  it  must  be  remembered,  cover  the  cost  of  the 
war  up  to  a  period  from  six  to  twelve  months  after  the  conclu- 
sion of  hostilities.  In  many  countries,  however,  large  expenses 
directly  connected  with  the  winding  up  of  the  war  continued 
and  m  any  final  statement  the  prodigious  figures  of  the  cost  of 
reconstruction  and  reparation  would  have  to  be  added.  These 
will  without  much  doubt  ultimately  well-nigh  double  the  above 
estimate. 

Table  C. — ^Total  War  Expenditures 
(In  millions) 
ASmHa  .'^'° ^'^^^  ^'  l^l^-Mar.  31.  1919 


New  Zealand. 

Canada 

South  Africa . 
India 


-Aug. 
-Mar. 


British  Empire 

France 

Russia 

Italy 


Aug.    3.  1914-Mar.  31,  1919  fr.' 

„a,^.  Aug.     1,  1914-Oct.    31,  1917  ru. 

R^^'i;.- • May  23,  1915-May    "    1919  li. 

g«'e»""? Aug.    2,  1914-Oct:     " 

Kumania ••     27    1916-  "       " 

f^^^^\  i,:\ •  •  •  ■  ••  ■  July  28,  1914-  "        "       " 

United  States April   5,  1917- June  30.  1919 


1918  fr. 


£8,601 

$41,887 

291 

1,461 

76 

365 

1,545 

33 

243 

119 

584 

169.000 

'  32;6i7 

51,500 

26,522 

81.0161 

15.636 

5,900 

1,387 

907 

635 

32,261 

$46,085 


1918 


1.802 
732 


Entente  Powers . 

Turkey Nov.   3.     "    -Oct     "     ^"^°         ^^^'^^        24,858 » 

Bulgaria Oct.     4,  1915-   "  "    " 

Central  Powers 

Total 

r,      ^  r.  ..  .  Loans  to  Allies 

FrTnoo^*^'" •  •  •  £1-739      $8,467 

GerSianv ^^'^OO         1.293 

uS'^ates:;:::::::;::;;;:::::;::;:::;::;;...™^^^    Ifol 


156.050 


76,008 
$232,058 


Total . 


21,123 


Total  net  war  expenditures j210  935 

II.  The  Revenues 

The  question  now  arises  as  to  the  steps  taken  by  the  various 
countries  to  meet  these  stupendous  outlays.  Of  the  older  ex- 
pedients, such  as  war  treasures  or  the  sale  of  public  property, 
there  was  naturally  no  question.  In  Germany  alone  was  there 
by  Secretary  Glass.  The  correct  total,  arrived  at  in  another  way,  will  be 
found  m  Table  H  below.  But  the  above  figures  are  the  only  ones  available 
for  calculating  the  monthly  and  daily  expenditures. 

1  The  total  expenditures  were  li.  91,016  millions.     Deducting  10,00J 
mulions  for  four  years  of  peace  expenditures  leaves  81.016 

2  Obtained  by  adding  to  the  war  debt  as  found  in  Table  R  approximately 
6  billion  marks  of  war  expenditures  paid  out  of  revenue. 

3  Obtained  by  using  the  figures  of  war  debt  as  found  in  Table  R. 


i\ 


768 


ESSAYS  IN  TAXATION 


a  war  treasure.    But,  as  even  this  was  so  smaU  as  to  be  well 
nigh  negligible,  it  follows  that  the  only  two  availabirreso^^^^^^^^ 
were  taxation  and  borrowing.  resources 

onSv  r  ^'^TT.r*^"'"  *^^  expedients  we  are  struck  not 
only  by  the  great  difference  in  the  theories  of  war  finance  fol- 
lowed  by  the  various  countries,  but  also  by  the  diversity  in  the 
economic  conditions  which  largely  influenced  the  choL  In 
general,  it  may  be  said  that  all  countries  were  compelled  to 

S.t '^.n^r^'n'-^'lri'^^  ^"  P"*^"^*  ^«^"^'  ^"t  th^t  Great 
tt^In  L^^^^^^^^^      "^  States  raised  a  greater  share  by  taxation 

bv  Iw  .     T-  '''""\"''-    ^^'^^^  ^^^'  ^"«*^"^^'  ^^«  ^ble  to  secure 

on  the_^ar  loans;  Germany  accomplished  this  only  in  part- 
while  France  was  not  in  a  position  to  defrav  anv  of  her  wai^ 

ents,  with  the  exception  of  some  of  the  British  colonies. 

tpmn^r  ?/''.rff  "^f  ^^^  ""^^^^^^  ^"  ^^*^"'  ^^  shall  first  at- 
tempt  to  set  forth  the  facts  as  to  war  taxation. 

f  bo  r.i  T'";  ""'  the  wealthiest  of  the  belligerents,  adopted  at 
he  outbreak  of  war  the  praiseworthy  method  of  Endeavoring 
to  raise  as  much  as  possible  from  taxation.  From  year  to  year 
as  the  expenses  mounted  up,  continually  more  demands  were 
made  upon  the  taxpayer.  The  war  expenditures  were,  however 
so  prodigious  that  it  soon  turned  out  to  be  impracticable  to 
totrnnXvf         .^  comparatively  small  proportion  of  the 

tTilustrl^/r^^  'Ti'""-  ^^  ^^'''  ^^^^^^ily  advanced 
tL  !>n  f  this  pomt  do  not,  however,  give  a  true  picture  of 
the  situation.  The  statements  made  by  the  various  chancellors 
of  t  le  exchequer,  and  repeated  by  all  commentators,  are  ba^ed 
Thi  .^  r^  /"""i  that  total  taxes  bear  to  total  expenditures, 
lliih  method  of  calculation,  as  will  be  seen  from  Table  D  shows 

exa  t   ^Q  n  """'^"T  '^  '*:i'  '^'^^  expenditures  or,  to  be  more 
exact,  24.9  per  cent,  was  derived  from  taxes.    These  figures 
however,  involve  a  double  error.    In  the  fiist  place,  the  Lli; 

2nfvTh?tf  r  "'  'V'''^^  '^'  ^^'  expenditures,  not 
simply  the  total  expenditures.  War  expenditures  can  best 
be  obtained,  as  we  have  seen,  by  deducting  from  the  total  annual 
expenditures  the  expenditures  for  the  last  full  year  of  peace. 
In  the  second  place,  what  is  significant  is  not  the  total  yield  of 

nf  l^^'^A^^      ?  f"^^^'  ^^  ""^^  ^^^^«'  *h^^  »«'  the  proceeds 

oLZ  ^K^ '^''fV*T'  '^''^  ^"""«  *^^  ^^''     These  again 
can  be  obtamed  by  deducting  from  the  total  tax  revenue  the 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     759 

yield  of  the  taxes  during  the  last  full  year  of  peace.    If  then  we 
endeavor  to  ascertain  how  much  of  the  war  expenditures  were 

met  by  war  taxes— and  this  is  really  the  important  problem 

we  find  that,  immense  as  were  the  burdens  resting  upon  the 
British  taxpayer,  the  percentage  of  war  expenditures  raised 
by  war  taxes  was  much  smaller  than  is  usually  stated.    As  a 
matter  of  fact,  as  appears  from  Table  D,  in  the  first  year  of  war 
only  a  Httle  over  7  per  cent  of  the  total  war  expenditures  were 
raised  from  war  taxes.    With  every  succeeding  year,  indeed, 
the  percentage  increased  until  in  the  last  year  of  war,  1918-1919,' 
slightly  over  one-quarter  of  the  war  expenditures   were  met 
from  war  taxes.    For  the  entire  five  years,  however,  the  pro- 
portion of  war  taxes  to  war  expenditures  was  about  17  per  cent. 
In  other  words,  only  a  little  more  than  one-sixth  of  the  war 
expenditures  in  Great  Britain  was  derived  from  war  taxes. 
Even  if  we  exclude  from  the  war  expenditures  the  sums  ad- 
vanced to  the  AlUes— and  the  Chancellor  of  the  Exchequer, 
Mr.  Chamberlain,  thinks  it  safe  to  allow  for  only  half  of  this 
amount— the  proportion  would  be  a  Httle  over  21  per  cent  or 
slightly  more  than  one-fifth.    These  figures  are  much  less  than 
is  ordinarily  stated.    But  even  this  proportion  of  revenue  de- 
rived from  taxation  was  sufl^cient  to  maintain  the  credit  of 
Great  Britain. 

In  the  other  belligerent  countries,  the  showing  was  by  no 
means  so  good.  France  struggled  under  a  double  difficulty. 
In  the  first  place,  France  was  invaded  at  the  outset  of  the  war: 
and  the  territory  occupied,  although  relatively  small  in  extent^ 
represented  the  richest  and  the  most  industrially  developed 
part  of  the  country.  This  operated  largely  to  reduce  the  or- 
dinary revenue.  In  the  second  place,  the  resultant  economic 
confusion,  as  well  as  the  general  political  situation,  rendered 
it  difficult  to  impose  any  new  taxes  at  all.  The  consequence, 
as  will  be  seen  from  Table  E,  was  that  for  the  first  three  years 
of  the  war  the  tax  revenues  of  France  were  actually  smaller 
than  before  the  war  and  that  as  a  result  they  did  not  suffice 
even  to  defray  the  ordinary  peace  expenditures,  not  to  speak 
of  making  any  contribution  to  war  expenditures. 

After  a  while,  indeed,  France  found  it  possible  to  levy  some 
war  taxes;  but,  as  appears  from  Table  E,  these  were  exceedingly 
slight  compared  with  what  had  been  accomplished  in  Great 
Britain.  The  consequence  is  that  the  new  war  taxes  of  France 
were  only  just  about  sufficient  to  make  up  the  deficit  in  the 


I 

I 


760 


ESSAYS  IN  TAXATION 

Table  D.— War  Expenditures  of  Great  Britain 
(In  millions  sterling) 


Total  expenditures 

War  expenditures  » ' 

Loans  to  Allies  and  Domin 
ions 

Revenues  other  than  loans. .  '. 

Tax  revenues 

War  tax  revenues  \  ..... ... 

Proportion  of  total  expendiJ 
tures  from  non-loan  rev- 
enues   

Proportion  of  total  expendi- 
tures from  taxes 

Proportion  of  war  expendi- 
tures  from  war  taxes 

Proportion  of  net  war  expendi- 
tures (less  loans  to  Allies 
and  Dominions)  from  war 
taxes 


Year  ending  March  30 


1915 


1916 


£ 

560 

357 


227 

189 

26 

P.c. 


40.5 

33.7 

7.3 


£ 
1,559 


337 
290 
127 
P.c. 


21.6 

18.6 

9.3 


1917 


£ 
2,198 


1,362   2,001 


573 

514 

351 

P.c. 


25.1 
22  4 
17.5 


1918 


£ 
2,696 
2,499 


707 

613 

450 

P.c. 


26.2 
22.7 
18.0 


1919 

£ 
2,579 
2,382 


889 

784 

621 

P.c. 


34.1 
30.4 
26.0 


Total  for 

the  five 

years 

1915-1919 

9,592 
8,601 

1,739 
2,733 
2,390 
1,475 
P.c. 


28.1 
24.9 
17.1 

21.2 


Table  E.— Revenues  op  France 
(In  million  francs) 


Direct  taxes 

Tax  on  war  profits 
Tax  on  intangibles 

Stamps 

Indirect  taxes. .  .  .  * 

Import  duties 

Tax  on  sales 

Monopolies 

Miscellaneous. .  .  . 
Total 


1,035 

539 

5,089 


931 

290 

3,982 


1,108 

254 

6,306 


727 
714 
252 

1,143 
734 

1,314 
210 

1,154 
285 

6,533 


Obtamed  by  deductmg  from  the  total  expenditures  each  vear  thp  np«r.« 
expenditures    or  1914,  amounting  to  197  millions.  ^  '  ^"""^ 

Obtained  by  deducting  from  the  tax  revenues  fhp  loi^i  i»^ 
amounting  to  163  millions  revenues  the  1914  tax  revenue, 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     761 

ordinary  peace  budget— a  deficit  caused  chiefly  by  the  devas- 
tation of  the  occupied  territory.  In  France,  therefore,  we  may 
conclude  that  no  part  of  the  war  expenditures  was  met  by  war 
taxes.  A  share  of  the  responsibiUty  for  this  fact  must,  however, 
be  laid  at  the  doors  of  the  government,  which  disclosed  an  un- 
warrantable timidity  in  levying  taxes.  The  natural  results  of 
the  adoption  of  the  loan  poKcy  in  the  fiscal  conduct  of  the  war 
are  seen  in  the  exaggerated  rise  of  prices,  the  depreciation  of ' 
the  franc,  and  the  serious  condition  of  finances  in  France  to-day.  ' 

In  Italy  the  situation  was  a  little  better.  Italy  had  not  been 
invaded,  and  its  financial  situation  was  not  so  desperate  as  that 
of  France.  Moreover,  Italy  entered  the  war  somewhat  later 
and  was  not  compelled  to  endure  the  strain  for  so  long  a  time. 
Italy  consequently  proceeded  as  soon  as  possible  to  levy  new 
war  taxes;  but,  as  she  had  always  been  relativelv  overtaxed  as 
compared  with  Great  Britain,  it  was  not  feasible  to  do  as  much. 
As  a  result,  the  war  taxes  levied  by  Italy  were  just  about 
sufficient  to  pay  the  interest  on  the  war  loans.  While  Italy, 
therefore,  did  better  than  France,  she  also  was  not  able  to 
defray  any  of  the  war  expenditures  proper  out  of  war  taxation. 

The  condition  of  Russia  soon  became  worse  than  that  of 
France  and  Italy;  and  even  before  the  October  revolution  in 
1917  Russia  was  able  to  put  very  little  reliance  upon  revenue 
from  war  taxation. 

Among  the  Central  Powers  the  situation  was  much  the  same, 
but  for  a  different  reason.  Germany  at  the  outset  of  the  war^ 
had  so  confidently  counted  upon  victory,  with  resultant  huge 
indemnities,  that  it  resolved  to  follow  the  loan  policy,  at  all 
events  so  far  as  the  imperial  government  was  concerned. 
For  it  must  be  remembered,  that  in  Germany  a  not  insignificant 
part  of  the  war  expenses  was  met  by  the  separate  states;  and 
in  the  states  a  considerable  increase  of  taxation  was  provided 
for  at  once.  As  the  war  proceeded,  however,  and  the  hopes  of 
a  speedy  and  complete  victory  gradually  faded  away,  Germany 
began  to  change  her  policy  and  now  decided,  especially  from 
1916  on,  to  impose  more  and  more  taxes.  The  result  was  that 
by  the  end  of  the  war,  Germany  had  done  a  little  better  than 
France  although  a  little  less  well  than  Italy.  The  figures  for 
the  chief  continental  belligerents  are  given  in  Table  F. 

If  the  later  figures  as  presented  by  Minister  Erzberger  are 
used,  the  showing  is  not  appreciably  more  favorable.  According 
to  these  figures,  of  the  total  war  expenditures  to  October,  1919, 


762 


ESSAYS  IN  TAXATION 


of  abo„t  m  billion  marks,  about  5  billions  were  derived  from 
other  sourora  than  loans.  "wivea  trom 

T^LE  F.-REVENrEs  A^  Expenditubeb:  France,  Italt,  Germany 

(In  millions) 
France 
Expenditures                Income 
Aug.  1,  1914-Mar.  31,  1919                   174  vm     t  Z^- 

Advances  to  Allies. . . . .:.;:::::;     6,700     --"-'■ ^^^'^^ 


Foreign  debts  and  other 
Total 


.        .  181,200 

mmor  items..    11,000 


Other  revenues. .  22^500 
181,900 


'•• .    . .  |g2  200 

Annual  revenues  before  the  war. .   '  .  ,^ 

Total  peace  revenues  during  the  war  period". 24  000 

Hence  the  total  non-loan  revenues  during  the  war  did 
peace  revenues  calculated  on  the  pre-war  baLis 


not  quite  equal  the 


Italy 


Income 


li. 


Expenditures 

May,  1915-June  30,  1918..  rt^ir  t 

Still  due '. . .   "^ 87,516  Loans 64,132 

^>Q^  Other  revenues. .  26,034 

Total Q-  „-  

Annual  peace"  revenues. ". ". '  ^^^^^ 90-166 


Total  peace  revenues  during  the 


2,687 


-^--c.^  jp^c»v.c:  ic  venues  aurmc  the  war  nprinrl  ,.'""' 

Deducfng  13,435  from  26,ol4  uZtl  ^'l^^  revenue; It'^ 

J  Jffenee  the  war  revenues  barely  sufficed  to  pay  the  interest  on  the  war 


Germany 

Expenditures 
Aug.  1,  1914-Dec.  31,  1918 170^^00 


Income 

J  mk. 

/^?"s 153,000 

other  revenues. .   17,000 

Annual  peace  revenues  (1913)  '^^^^^ 170,000 

Total  peace  revenues  for  4  V^  vears  of  wnr ^'^^0 

Deducting  14,400  from  17,6^^ref  al  war  revenue 1'^SS 

Jhe  war  revenues  thus  did  not  suffice  to  pay  the  interest  on  the  'war 

We  come,  finally,  to  the  experience  of  the  United  qf«f.« 
When  the  United  States  entered  the  war,  it  wL  cSl^^d  h 
the  two  rival  theories  of  public  finance.  One  wa.  to  t^^^^^ 
that  the  war  expenses  should  be  defrayed  entire"  hyt^TZ 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     763 

had  been  the  case  in  the  early  years  of  the  Civil  War  and  which 
was  true,  as  we  have  just  seen,  of  many  of  the  belligerents  during 
this  war.  The  other  theory,  advanced  especially  in  the  famous 
Minnesota  memorandum,  ^  was  that  the  war  expenditures  ought 
to  be  defrayed  entirely  out  of  war  taxes.  This  theory  was 
equally  a^  extreme  and  a.s  perilous  a.s  the  loan  theory  and 
labored  under  the  additional  disadvantage  of  being  impossible 
of  achievement.  The  President  went  so  far  as  to  proclaim  the 
titty-hfty  per  cent  theoiy,  namely  that  one-half  of  the  war  ex- 
penditures ought  to  be  defrayed  from  war  taxation  But 
even  this  turned  out,  as  was  to  have  been  expected  and  as  was 
pointed  out  by  the  present  writer  among  others,  to  be  far 
more  than  was  possible. 

The  prodigious  profits  made  during  the  opening  vears  of  the 
l.uropean  war  and  the  resulting  prosperity  throughout  the 
country  enabled  Congress  to  levy  taxes  far  higher  than  had 
ever  before  been  attempted  in  our  history.    Even  with  an  im- 
mense addition  to  taxation,  however,  the  proportion  derived 
iroin  war  taxes  was  relatively  small,  and  in  fact  considerably 
smaller  than  is  ordinarily  stated.    Here,  again,  we  must  ob- 
serve the  same  caution  as  in  the  case  of  the  British  figures 
We  must  not  compare  the  total  expenditures  of  the  war  period 
with  the  total  taxes  of  the  war  period,  Imt  war  expenditures 
with  war  taxes— which  is  something  very  different.    In  Tables 
tx  and  H  an  attempt  is  made,  on  the  basis  of  certain  official 
figures    to  arrive  at  correct  results.     The  explanation  of  the 
methods  of  calculation  is  found  in  the  notes  appended  to  the 
tables;  and  the  reasons  for  the  difference  between  the  re'^ults 
here  given  and  the  statements  of  the  secretaries  of  the  treasurC- 
are  presented  m  the  general  note  below.^ 

J  '^^^.^innesota  memorandum,  signed  by  a  number  of  economists  was 
o?  Minneso~ ''  ^"     "''"^  ^^  ''"^'  "'  ''''  '^^^^'^^  ^'  ^^«  UnlvLTty 

fhl  w5^'^'/.^^^  otherwise  stated,  are  taken  from  the  annual  Reports  of 
the  Secretary  of  the  Treasury  on  the  Finances  for  1918  and  1919  A  nrZ 
bminary  estimate  will  be  found  in  Secretary  G W  Letter  of  July  9  19W 
to  the  Chairman  of  the  Committee  of  Ways  and  Means,  which  ser;^^ 
the  basis  of  the  (sbghtly  different)  conclusions  arrived  at  by  the  prSe^ 
wnter  m  the  origmal  article  from  which  this  chapter  is  reprinted 
The  figu^^  f  P^^^^t^  i^  the  tables,  do  not,  however,  always  agree 

are  the  official  figures,  as  they  frequently  differ  among  themselves     For 
instance^the  figures  found  in  the  tables  of  the  Annml  ReportTr  1918 
pages  480  et  seq.  (hereinafter  caUed  A),  do  not  taUy  with  those  in  the  text 


■If 


7G4 


ESSAYS  IN  TAXATION 


As  a  result  of  the  calculatioas  found  in  Tables  O  and  H  it  ap- 

30,  1917,  the  proportion  of  war  expenditures  derived  from  war 
taxes  was  less  than  one-third  or,  more  exactly,  30  per  cent  If 
we  exclude  from  the  expenditures  the  loans  to  the  Allies  on 
the  problematical  assumption  that  they  will  all  be  repaid  some 
day  the  showing  m  the  first  three  months  is,  of  couL,  much 

KchTo^r^K ''  "'  ''^  expenditures  of  that  period  consisted 
ot  such  loans.  However,  as  soon  as  we  struck  our  full  gait  the 
situation  was  far  less  satisfactoiy.  During  the  year  1917-1918 
the  proportion  of  war  expenditures  derived  from  war  taxes  was 

iltrcaZi^f '^^^^^^^  ^"  the  ^«.mo/  Report,  pages  3-5  (here- 

maiter  callecl  B),  nor  with  the  figures  of  Secretary  Glass  in  his  Lelter  nf 
July  9  (hereinafter  called  C).    In  some  cases  the  dLrepancL  are  serb^^^ 

•J  H-"  ^  '^o  r^'P^^  ^""^  ^^17  ^'^  Siven  (including  postal  rTceTps  of 
330  millions)  as  3  845  millions;  in  B,  as  3,552  (excluding  posal      Forl918 

^5?'  r  .  Jf'^v  ^'^  ^^'^"'^  ^"  ^  ^  21,490  millions  (Including  posta  r^ 
ceipt^  of  344  millions);  in  B,  as  21,155  millions  (excludinrpos^ar  In  t 
the  disbursements  for  1917  are  given  as  3  04fi  milUnnl  rlT^-  .  , 

disbui^ements  of  320  millions) ;  in^,^^  2  7^71Tu1T^^^^^^^^ 
deta^^r  ^^'  ^l^«crepancies  are:  A,  21,813;  B,  20,903      Even  in  minor 
de  ails  there  are  no  agreements.    Thus  public  debt  receipts  are  ^veTfor 
1917  m  A  as  2,391  millions;  in  B,  as  2,428  millions.    For  1918  the  filr^ 
are  respective  y:  A,  16.965-  B    IfiQT^      p„ki.„  a  ut  I  u  ngures 

civenforlQITfn  A  ooaqV^-  d  'Hz:  •  "^  ^'^^*  disbursements  are 
given  lor  iyi/  in  A  as  637  m  B,  as  678  mill  ons  Fnr  loic  ♦u^, 
in  A  as  7  fiS^i-  in  R  oo  -7  tiy?  n-  "'«  "»""ons.  i*or  1918  they  are  given 
m  A  as  7,685  inB,  as  7,707  millions.  If  there  is  any  significance  in  the  fact 
tha  A  gives  tablc^  of  ''Receipts  and  Disbursements"  whileTgivest^^^^^^^ 
of  Receipts  and  Expenditures,"  it  is  not  apparent  from  he  rfnort  i^solT 
SimUar  discrepancies  are  found  in  Secretary-  cTass'  AnnuaT^.^^Xr  19  9  ^^ 
The  discrepancies  between  A  and  C  are  more  glaring.  BuVaL  Wtarv 
Gla^  was  able  to  present  only  preliminary  figures  for  the  r^ec^ve  peri^^^ 

In  the  second  place,  considerable  confusion  results  from  the   absurd 
system  still  foUowed  in  the  United  States,  whereby  postd  revenues  and 
expenditures  go  through  the  post  office  accounts  and'^^n  ^^sur^^^^^^^ 
deficiency  pa^es  through  the  treasury  accounts.    Several  yea^aco  thp 
present  writer  succeeded  in  inducing  the  Treasury  SmenMo  br  n^ 

made  uVinTth"  ''"  ''^''"'  ''"'  ''''  ^"""^*  '^'^y  sLteSs  are  now 
made  up  m  both  ways,  mz.,  as  revenues  and  expenditures  inclusive  and 

exclusive  of  postal  revenues  and  expenditures  respecUvdy      Yet   the^e 

differences  are  often  overlooked.     For    instance,    when  Secretarv   GlSs 

discusses  m  his  Letter  of  July  9,  1919,  the  cost  of'the  war,  hrlpLs  tte 

daily  treasury  statements  which  do  not  include  the  pos[k  Ifigt^r   As  ' 

consequence,  his  statement  of  total  revenues  and  expemUturesTre  auite 

In  the  third  place,  neither  Secretary  McAdoo  nor  Secretary  Glass,  in  cal- 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     765 

less  than  a  quarter  or,  more  exactly,  only  24.8  per  cent;  and  even 
if  we  again  exclude  loans  to  Allies,  which  now  constituted  about 
one-third  of  the  whole,  only  39  per  cent  of  the  expenditures  were 
derived  from  war  taxes.  In  the  final  year  of  the  war  the  showing 
was  still  less  favorable,  the  figures  being  respectively  18.6  per 
cent  and  23  per  cent,  i.  e.,  a  little  less  than  one-fifth  or  one- 
fourth  respectively.  For  the  entire  period  of  our  participation 
in  the  war  it  appears  that  only  slightly  over  one-fifth  (or  exactly 
21.59  per  cent)  of  the  war  expenditures  were  paid  out  of  war 
taxes.  And  if  the  loans  to  Allies  are  again  excluded,  the  pro- 
portion is  still  under  one-third  or,  more  exactly,  30.32  per  cent. 

culating  the  proportion  borne  by  loans  and  taxes  in  meeting  the  war  ex- 
penses, attempts  to  ascertain  the  really  significant  fact— m.,  the  proportion 
of  war  expenditures  met  from  war  taxes.  None  of  the  official  figures  are 
of  any  help  here. 

The  present  writer  has  therefore  been  compeUed  to  make  his  own  cal- 
culation. Whenever  possible,  the  figures  have  been  taken  from  the 
statements  m  the  detailed  tables  published  in  the  Annual  Report  of  the 
Secretary  of  the  Treasury.  The  combinations,  however,  as  found  in  this 
chapter  are  not  presented  anywhere  in  the  official  statements. 

Sonie  of  the  results  reached  in  this  chapter  which  differ  materiaUy  from 
the  oflficial  statements,  are  as  follows: 

«Qn^?7 ''*''!, •''''^*  ""^^^^  '^^''  ^"^  '^""'^  ^^'  ^^^^'  ^^  Siven  by  Secretary  Glass  as 
*JU,117  millions,  whereas  the  more  accurate  computation  resuhs  in  a  total 
cost  of  $32,694  millions.  Secretary  Glass's  figures  involve  a  double 
error.  In  the  first  place,  they  are  based  on  the  preliminary  daily  treasury 
statement^  which  are  confessedly  not  final;  and,  as  explained  in  the  note 
to  1  able  B  (p.  764,  supra),  he  fails  to  allow  for  postal  expenditures  In  the 
annual  Report  for  1919  Secretary  Glass  gives  his  revised  figures  of  the 
cost  as  $32,830  millions.  He  reaches  this  result  by  taking  the  peace  ex- 
penditures at  a  round  sum.  Again,  Secretary  McAdoo  states  that  in  1917 
55  per  cent  of  the  expenditures  were  paid  from  revenue  receipts,  and  in 
1918  31.6  per  cent;  whereas  the  correct  figures  are  60.4  per  cent  and  33  8 
per  cent  respectively,  and  the  really  significant  figures  (the  proportion  of 
war  expenditures  from  war  taxes)  are  30  and  24.8  per  cent  respectively 
In  the  annual  Report  for  1919  Secretary  Glass  states  on  p.  25  that  "nearly 
32%"  of  the  disbursements  during  the  war  period  April  6,  1917,  to  Oct.  31 

1919,  was  "met  out  of  tax  receipts  and  other  revenues  than  borrowed 
money."  This  does  not  differ  much  from  our  figures  of  31.16%.  But  the 
Secretary  says  nothing  about  the  really  important  point— the  relation 
between  war  expenditures  and  war  taxes.  On  the  other  hand,  in  the  Re- 
port for  1920  where  Secretary  Houston  continues  the  figures  to  June  30 

1920,  he  estimates  the  total  cost  of  the  war  to  that  date  at  $33,455  mil- 
lions, and  figures,  on  the  basis  of  some  rather  dubious  calculations,  that 
war  taxes  supplied  32%  of  the  war  expenditures.  Apart  from  all  other 
objections,  it  is  obviously  entirely  misleading  to  continue  the  figures  dur- 
mg  the  fiscal  year  1920  when  the  war  taxes  remained  almost  unabated,  but 
when  the  so-called  war  expenses  were  only  those  of  the  aftermath  of  the  war. 


Ill 


II 


i 


11 


766 

Table   G. 


ESSAYS  IN  TAXATION 
-Receipts   and   D^sbu^^ements  op  the   United  States, 

(In  millions) 


Receipts 


Customs 

Internal  revenue 

Miscellaneous 

Total  ordinary  receipts . 

Panama  canal 

Excess  of  deposits  to  retire 
national  banknotes .  . 

Postal  receipts 

Total  (exclusive  of  princi- 
pal of  public  debt) 

Public  debt  receipts 


Year  ending  June  30 


1915 


1916        1917 


1918 


$ 


Total 


Disbursements 

Ordinary  (exclusive  of 
postal) 

Including  loans  to  Allies 

Panama 

Postal ."...... 

Excess  of  national  bank- 
notes retired  over  de- 
posits  


211 

416 

71 

698 


4 

287 

989 
1 


990 


$   213 

513 

52 

780 


32 
312 

1,126 
2 


1,128 


I    226 

809 

81 

1,119 

6 


330 

1,455 
2,391 


3,845 


$    725 

29 
294 


Total  (exclusive  of  princi- 

pal  of  public  debt) 

Public  debt  disbursements 


I    719 

"l8 
312 


$      183 

3,696 

293 

4,174 

6 


344 

4,795 
16,695 

21,490 


1919 

$      183 

3,840 

624 

4,648 

7 


365 

5,020 
29,053 

34,073 


$2,067 

(885) 

19 

320 


$13,769 

(4,738 

21 

327 


$18,939 
(3,793) 
12 
363 


Total 


1,048 
0.05 


$1,048 


1,048 
0.04 

$1,048 


2,409 
637 


$3,(M6 


n 


14,127 
7,686 


$21,813 


19,302 
15,814 


$35,130 


These  figures  disclose  two  significant  facts.     In  the  first 
place,  the  relative  revenue  derived  from  war  taxes  became 
smaller,  mstead  of  larger,  a^  the  war  proceeded.    This  unusTa! 
and  unexpected  result  is,  of  course,  due  to  the  s  upendou 
growth  of  war  expenditures  which  rapidly  overtook  even  the 
largely  mcreased  revenues  from  war  taxes.    It  was  impossible 
even  by  stretching  the  tax  revenues  to  the  utmost,  tXg  n  to 
keep  pace  with  the  huge  growth  in  the  war  outkys     In  the 
second  place,  we^are  struck  by  the  great  disparity  between  the 
actual  facs  and  the  fifty-fifty  per  cent  program  originallv 
suggested  by  Secretary  McAdoo  and  adopted'in  theTom' 
mendation  of  President  Wilson-not  to  speak  of  the  one  hundred 
per  cent  program  of  the  Minnesota  memorialists. 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     767 

Table  H.— Receipts  and  Expenditures  op  the  United  States  April  5 

1917-JuNE  30,  1919  '  ' 

(In  millions) 


Total  disbursements  * 

Total  expenditures,  exclusive  of  prin- 
cipal of  the  public  debt  ^ 

War  expenditures  ^ 

Loans  to  Allies  ^ 

War  expenditures  exclusive  of  loans 

to  Allies 

Revenue  exclusive  of  public  debt  i .  . 

Tax  revenues  ^ 

War  tax  revenues  * 


1917 


1918 


$3,046 

2,409 
1,361 


$21,813 

14,127 
13,079 


1919 


Proportion  of  total  expenditures  from 

non-loan  revenues 

Proportion  of  total  expenditures  from 

taxes 

Proportion  of  war  expenditures  from 

war  taxes 

Proportion  of  war  expenditures  exclu- 

sive  of  loans  to  Allies  from  war  taxes 


885 

476 
1,455 
1,035 

409 
P.c. 

60.4 

42.9 

30. 

85.7 


4,738 

8,341 
4,795 
3,879 
3,253 
P.  c 

33.8 

27.4 

24.8 
39. 


$35,130 

19,302 
18,254 


Total  for 

period  Apr.  5, 

1917-June  30, 

1919 


3,793 

14,461 
5,020 
4,023 
3,397 
P.c 

26.00 

20.83 

18.61 

23.62 


$59,989  5 

35,838* 
32,694 


9,416 

23,278 

11,270 

8,937 

7,059 

P.c. 

31.16 

24.91 

21.59 

30.32 


III.  The  War  Taxes 

The  next  point  of  interest  is  the  character  of  the  war  taxes  im- 
posed by  the  various  countries.  Here  again  we  notice  great 
variations.  Although  the  policy  of  taking  a  substantial  share 
of  war  profits  by  taxation  was  almost  everywhere  adopted  as 
a  matter  of  principle,  it  was  applied  very  differently  in  various 
countries.  As  a  matter  of  fact,  in  almost  all  of  the  continental 
countries,  about  as  much  additional  revenue  was  raised  from 
indirect  as  from  direct  taxation.  Indeed,  in  France  consider- 
ably more  revenue  was  designed  to  be  raised  from  indirect 
taxes,  including  taxes  on  consumption,  than  from  direct  taxa- 
tion or  taxes  on  wealth.  The  respective  figures,  as  appears 
from  Table  I,  are  about  60  per  cent  for  indirect  and  40  per  cent 

1  From  Table  G. 

2  Obtained  by  deducting  from  total  expenditures  the  (peace)  expendi- 
tures of  1915  ($1,048).  ^ 

'  Obtained  by  adding  the  customs  and  the  internal  revenue. 

*  Obtained  by  deducting  from  the  tax  revenues  for  1916  (626  millions) 

^  Total  for  the  three  fiscal  years  1917,  1918,  1919. 


if 


iM 


IJ 


i 


768 


ESSAYS  IN  TAXATION 


to  the  fact  thati  war  ifs  tax  vSh!Ii'''''1''^'  ^"t  P'*'-*'>' 
been  anticipate..  m,SoVZ':'t;^tZVZo;^oi^ 

?inn  flt„i  f  A  '*''  ''*'^"  ''"P*^  f""-  (210  instead  of  800  mil- 
hon  fran«).  As  a  consequenco,  the  proportions  der  ved  fmm 
dirsct  and  indirect  taxes  were  actuallv  i..=t  tu^  "erivea  irom 
mentioned  above,  namely.  :^lTt^j:f;:'Zl:fZ 
about  40  per  cent  from  indirect  taxi.  *"^ 


(In  million  francs) 


Direct 


War-profits  tax 

Military  war  tax.  . . . 
Income  tax 

"Assimilated  taxes". 

Inheritance  tax 

Intangibles 

Land  tax 


540 

12.5 
250 

24 
148 

38 

30 


Indirect 


1  042  5 
Additions  of  June,  1918: 
Income  tax         ^ 
Inheritance  tax  j        ^ 


1,098.5 

or  39.3  per  cent 


Alcoholic  drinks. . .  75 

Non-alcoholic  drinks.  85 

Druggists  specialties .  12 

^ugar QQ 

Colonial  products .  .  70 

Tobacco.  .  .  gQ 

?f*age :;.■;:;  53.5 

ineatres |q 

Sales ; ; ; ;  sqq 


A  1 1-i-         .  -  1,280.5 

Additions  of  June,  1918: 
Stamp  taxes jq 

Other  indirect  taxes  333 


1,689.5 

or  60.7  per  cent 


lof?  ^-f^'^'  '^•""■^  *^^  "'■'^  ^'*''  *^''«'  were  imposed  at  once  in 
19J5,  It  was  expected  that  the  war-nrofits  tRWor*K       .      r 

fn>m  8  to  20  per  cent)  would  .yield  aboS  Sio^'liteantthl 
augmented  taxes  on  incomes  and  business  ,X  1^990      n- 
^  a  totai  of  275  millions  from  dirertTxeVtmS  ^2 

SSSIaxT""^  °^  "'  ™"'°-  ^-^  -™-  ---in 
,-nJ"  ^^i^'  ''"^^^^'•'  '^hile  the  rate  of  the  war-profits  tax  was 

Seta^raLTTe^Sr^nt'tS^  Z  ''1  ^^^^^^^^^^^^ 
a«^  +k  I       V*''  ^"  P^^  ^^nt,  the  stamp  taxes  were  ^ai^pH 

and  the  number  of  state  monopolies  was  increaspd  ^^J^"^^ 

pohey  was  followed  during  the  next  Tear  so  th"?*!.^^ 
of  the  war   in  idrlitmn  ^Av.       !j      ^  ^"^^  ^^  ^^^  end 

ine  war,  in  addition  to  the  old  government  monopolies  on 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     769 

tobacco,  salt,  matches,  lotteries,  and  cards,  we  now  find  mo- 
nopolies on  coffee,  paraffine,  and  mineral  oils,  quinine,  and 
various  minor  objects.  The  result  was  that  in  1918  just  about 
as  much  additional  revenue  was  derived  from  the  new  indirect 
taxes  as  from  the  new  direct  taxes.  The  exact  figures  are  as 
follows:  the  direct  taxes,  technically  so  called,  yielded  1,500 
million  lire  and  the  business  taxes  560  millions,  or  a  total  of 
2,060  millions.  On  the  other  hand,  the  increased  revenue  from 
monopolies  amounted  to  1,060  millions  and  that  from  the  new 
consumption  taxes  950  millions,  or  a  total  of  2,010  millions. 
In  Italy,  therefore,  the  balance  was  kept  just  about  even  be- 
tween the  two  great  categories  of  taxation. 

In  Germany  when  the  government  finally  decided  to  resort  to 
taxation  in  1915,  no  effort  was  made  to  impose  any  new  taxes  on 
incomes  or  inheritances.    For  the  feeling  was  still  very  strong 
that  income  and  property  taxes  ought  to  be  left  to  the  separate 
states,  which  had  in- the  meantime  considerably  increased  their 
revenue  from  such  sources.    A  federal  tax  on  war  profits  was, 
however,  imposed.    On  the  other  hand,  the  tax  on  tobacco  was 
largely  increased,  a  high  tax  was  levied  on  bills  of  lading,  and  a 
considerable  augmentation  was  made  in  postal,  telegraph,  and 
telephone  rates.    From  all  these  sources  an  additional  revenue  of 
about  500  million  marks  was  expected.    When  the  bill  passed 
through  the  Reichstag,  a  tax  on  sales  was  added,  estimated  to 
yield  about  130  millions.    In  the  next  year,  1917,  the  war  profits 
tax  was  considerably  increased,  so  as  to  produce  about  400  mil- 
lion marks  additional;  but,  on  the  other  hand,  a  high  tax  on  coal 
was  now  imposed,  designed  to  yield  500  million  marks  and  pro- 
vision was  made  for  a  tax  on  railroad  transportation  to  yield 
310  millions.    Finally,  in  1918,  the  government  recognized  the 
necessity  for  very  much  greater  revenues  from  taxation  and  a 
law  provided  for  additional  receipts  estimated  at  3  billions  of 
marks,  on  the  one  hand,  from  an  increased  tax  on  war-profits 
and,  on  the  other,  from  taxes  on  sales,  luxuries,  and  higher  rates 
on  drinks  and  postal  communication.    The  exact  figures  as  to  the 
proportion  between  the  two  categories  of  taxation  are  not  yet 
available;  but  it  is  quite  safe  to  say  that  in  the  federal  govern- 
ment, at  least,  the  revenue  from  indirect  taxes  considerably  ex- 
ceeded that  from  direct  taxes.    In  the  separate  commonwealths 
the  situation  was  the  reverse,  without,  however,  materially 
changing  the  general  result. 
In  contrast  to  all  the  continental  countries,  England  pursued 


!< 


I 


11 


M 


!i 


770 


ESSAYS  IN   TAXATION 


from  the  outset  a  different  path.    It  is  true  that  a  considerable 
increase  of  revenue  was  derived  from  indirect  taxes  like  custong 
and  excises.     From  1914  t^  1919,  for  instance,  the  customs 
revenues  were  actually  trebled  and  the  yield  of  the  excise  taxes 
increased  about  50  par  cent.    But  the  chief  reliance  for  meeting 
the  war  expenditures  was  placed  on  a  new  war-profits  tax  and 
an  augmented  income  tax.    The  rate  of  the  war-profits  tax  was 
raised  gradually  from  50  to  60,  and  finally  to  80  per  cent;  and 
the  income  tax  rates  were  progressively  increased  untU  from  a 
quarter  to  a  third  of  very  moderate  incomes  and  over  a  half  of 
larger  incomes  were  taken  for  the  state.    In  the  last  year  of  the 
war,  as  appears  from  Table  K,  over  three-quarters  of  the  tax 
revenue  was  derived  from  direct  taxes  on  wealth.    This  is  a 
great  contrast  to  the  fiscal  history  of  previous  wars. 

In  the  United  States,  also,  we  find  the  democratic  movement 
so  strong  that  the  overwhelming  proportion  of  the  new  tax 
revenue  was  derived  from  direct  taxation  on  wealth  rather  than 
from  indirect  taxes  on  consumption  or  transactions.  •  Although 
the  excess-profits  tax  was  not  at  first  levied  at  rates  as  high 
as  m  Great  Britain,  the  remarkable  prosperity  of  the  country 
resulted  in  large  revenues  from  this  source.    And  while  the  in- 
come tax  did  not  reach  in  the  lower  stages  so  high  a  level  as 
the  British,  the  rates  in  the  upper  schedules  were  made  con- 
siderably higher,  finally  attaining  the  unheard  of  figures  of  77 
per  cent.    As  a  result  of  the  revenue  act  of  1917  over  79  per 
cent  of  the  tax  revenue  came  from  direct  taxation,  principally 
the  income  tax  and  the  excess-profits  tax.   After  the  second  great 
revenue  act  of  1918  was  enforced,  the  proportions  were  still 
more  favorable,  the  amount  ascribable  to  direct  taxation  in 
1919  being,  as  appears  from  Table  L,  in  reaUty  almost  81  per 
cent,  although  the  introduction  of  the  system  of  payment  by 
mstahnents  somewhat  obscured  this  result. 

It  thus  appears  that  the  United  States  succeeded  even  better 
than  Great  Britain  in  carrying  through  a  democratic  fiscal  pro- 
gram m  the  war;  and  that  the  Anglo-Saxon  countries  disclose  a 
veiy  decided  contrast  to  all  the  other  belligerents.  The  conse- 
quences are  apparent  in  the  relatively  more  favorable  situation 
m  which  Great  Britain  and  the  United  States  found  themselves 
when  confronting  the  problems  of  post-bellum  finance. 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     771 


m 

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I 


772 


ESSAYS  IN  TAXATION 


Table  L.— Internal  Revenuk  Receipts  of  the  United  States,  1918,  1919 

(In  millions) 


Income  and  profits  taxes.  .  .  . 
Munition  manufarturers  tax. 

Estate  tax 

Corporate  capital  stock  tax .  . 

Total  taxes  on  wealth 

Distilled  spirits 

Fermented  liquors 

Tobacco 

Stamp  taxes 

Transportation 

Insurance 

Excise  taxes 

Soft  drinks 

Admissions 

Miscellaneous 

Total    taxes    on    consump- 
tion,    transactions,    and 

commodities 

Total 


Year  ending  June  30 


1918 


$2,839 
13 
47 
25 


2,924  or  79.1  percent 


318 

126 

158 

19 

71 

6 

37 

2 

26 

8 


$771  or  20.9  percent 
$3,695 


1919 


$2,601 » 

82 
29 


2,707  or  70.5  percent 


365 

118 

206 

37 

234 

15 

78 

7 

51 

22 


$1,133  or  29.5  per  cent 
$3,840 


IV.  The  Loans 

With  the  impossibility  of  securing  more  than  a  comparatively 
small  proportion  of  the  war  expenditures  from  taxation,  it 
became  necessary  everywhere  to  resort  to  borrowing.  This 
was  consequently  done  by  all  countries  on  a  gigantic  scale; 
although  here  again  the  fiscal  and  economic  conditions  in  the 
various  countries  varied  so  widely  that  they  employed  quite 
diverse  expedients. 

Great  Britain  provided  at  the  outset  of  the  war  for  immediate 
needs  by  selling  short-time  securities,  principally  treasury  bills. 
Before  long,  however,  these  had  accumulated  to  such  an  extent 
that  it  became  imperative  to  issue  long-time  bonds.  Accord- 
ingly, subscriptions  were  invited  to  the  first  war  loan  which 
was  issued  in  March,  1915,  followed  in  June  of  the  same  year 
by  a  second  war  loan.  These  bore  interest  at  the  rate  of  33^ 
per  cent  and  4}4  per  cent  respectively  and  the  amount  issued 
was  332  and  592  millions  sterling  or  1,703  and  2,883  million 
dollars  respectively.     On  February,  1916,   an  issue  of  war 

*  As  the  new  taxes  were  payable  in  instalments,  about  2  biUions  of  the 
tax  really  payable  for  the  year  1919  were  not  received  until  the  fiscal  year 
1920.  Making  allowance  for  this,  the  proportion  of  taxes  on  wealth  really 
ascribable  to  the  year  1919  rises  to  80.6  per  cent. 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     773 

savings  certificates  was  inaugurated.  In  April,  1917,  the  third 
war  loan  was  issued  at  4.5  per  cent,  yielding  941  millions  sterhng, 
or  4,403  million  dollars,  followed  in  June  of  the  same  year  by 
an  issue  of  5  per  cent  exchequer  bonds. 

Beginning  in  October,  1917,  a  continuous  issue  of  4  per  cent 
and  5  per  cent  national  war  bonds  was  made,  the  difference  in 
the  rate  of  interest  being  due  to  the  tax  exemption.  The 
temporary  and  short-time  paper  was  now  gradually  funded 
into  these  bonds.  In  the  meantime  the  Anglo-French  loan  of 
500  million  dollars,  of  which  England  had  one-half,  had  been 
contracted  in  the  United  States;  and  with  the  entrance  of  the 
United  States  into  the  war,  continually  larger  sums  were  bor- 
rowed from  the  American  government.  By  the  end  of  1918, 
as  will  be  seen  from  Table  M,  almost  4  billions  sterling,  or  con- 
siderably more  than  one-half  of  the  new  debt,  was  in  the  form 
of  relatively  long-time  domestic  securities. 

France  was  in  a  less  favorable  situation  than  Great  Britain  at 
the  outbreak  of  the  war.  The  total  debt  of  France  at  the  close 
of  1913  amounted  to  32,594  million  francs  or  6,291  million  dol- 
lars, and  the  ordinary  budget  had  closed  with  a  large  deficit,  so 
that  it  had  been  necessary  to  issue  a  loan  during  the  spring  and 
summer  of  1914.  When  the  war  broke  out,  precipitating  an 
economic  and  financial  crash,  it  became  practically  impossible 
to  issue  another  loan.  The  government  was  therefore  com- 
pelled to  rely  upon  advances  from  the  Banque  de  France  which 
was  permitted  correspondingly  to  increase  its  note  issue.  It 
was  not  until  November,  1915,  that  France  saw  her  way  to 
invite  subscriptions  to  her  first  war  loan,  which,  although 
bearing  interest  at  the  rate  of  5  per  cent,  was  issued  at  the  low 
price  of  87}^.  This  was  followed  in  August,  1916,  by  the 
second  war  loan,  also  of  5  per  cent  bonds.  In  December,  1917, 
the  third  war  loan  was  contracted  and  in  1918  the  fourth  war 
loan.  In  these  two  latter  cases  France  reverted  to  her  old 
policy  of  discount  bonds  so  that  the  issues  fetched  the  price 
of  only  about  70.  The  nominal  subscriptions  to  the  loans  were 
therefore  quite  different  from  the  actual  receipts  in  cash. 
Even  the  nominal  sums  yielded  by  these  four  loans,  however, 
amounted  to  less  than  70  billions  of  francs,  so  that  the  chief 
reliance  of  France  had  to  be  placed  on  floating  debts  like  ad- 
vances from  the  bank  of  France,  on  the  so-called  national 
defense  bonds,  which  were  issued  continuously  from  February, 
1915,  and,  finally,  on  the  foreign  loans  contracted  in  England, 


I 


I  r 

r 


»: 


774 


li 


il 

'I 


ESSAYS  IN  TAXATION 


cunties    hke  treasury  bonds  and  exchequer  bills    urZ   «T 

Zfr.f  ?       >  '""'  ^'''^  ^  P*^  •*"*  of  the  new  war  ^bt  con- 
sists of  long-tune  internal  war  bonds 

from  .t  o'iSf  'rdSid'Srrir''  • "™'  ■"" 

s^nW^t?*    ;i.  "^  '^^^''*'  y^"^  prided  herself  upon  her 

SToLr  fg  4  '^l^P^'^r''  ^"^^  '^"''^•"  -d.  France  In 
fd Lt^'  n  igu  r^c^^r  :^Vr"*  ^*  ^  ^^  -«*•  There 
4H  per  cnt  ^tl  i^rTurL^UvT  ^uH  Mhet'S 

must  be  pronounced  to  have  been  more  favorable  than  tZ^ 
of  the  other  belligerent..     Towani  the  end,  however   L  the 

Ge^lTlikeT""'  *'^.  j"*?™^'  """-^  '••^  noriufficn^ 
uermany,  like  France  and  Italy,  was  now  compelled  to  denend 

ena  ot  1918  98  billion  marks  out  of  a  total  war  debt  of  15S 
billions  or  about  64  per  cent  of  the  whole,  was  in  the  form  of 

rafrLttfT'  "Th'"  ^'^^  "^  "^  '^«-  "howligTh^ 
mat  ot  any  of  the  other  countries.  &  ^^  *" 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     775 
Table  M.— War  Loans— (In  millions) 


Great  Britain 
First      war  loan .  .  .  . 
Second     "      " 
Third       "      "...." 
Exchequer  bonds. . . . 

National  war  bonds . 
Total 

France 
First     war  loan .... 
Second     "      "    . 
Third       •*      "    .  . 
Fourth  .  "      "    

Total. 

Italy 
Mobilization  loan ... 

First     war  loan 

Second     " 

Third       "      "   .  . 

Fourth     "      "   

Total 

Russia 

First     war  loan 

Second 

Third 

Fourth 

Fifth 

Sixth 

Seventh 

Total 

Germany 
First  war  loan 
Second 


<< 
(( 
<( 


<< 
« 
II 
il 
il 
it 


il 


li 


il 
il 
il 
il 
it 


II 
II 
II 
il 
It 


Third 

Fourth 

Fifth 

Sixth 

Seventh 

Eighth 

Ninth 

Total 

United  States 
First  lil3erty  loan. 
Second  "  "  . 
Third  "  "  . 
Fourth  "  "  . 
Victory  loan 

Total 


Date 


Mar.,  1915 

June      " 

Apr.,   1917 

Mar.,  1915 

Dec,  1915-Apr.,  1917 

Oct.,    1916 

Oct.,    1917-Oct.,  1918 


Nov.,  1915 
Aug.,  1916 


Dec, 


(( 


Jan., 
July 

Jan., 

li 


il 


1917 
1918 


1915 

(( 

1916 
1917 
1918 


Sept.,  1914 
Mar.,  1915 
May       " 
Nov.      " 
Feb.,   1916 
Oct.        " 
Mar.,  1917 


Sept.,  194 
Mar.,  1915 
Sept.      " 
Mar.,  1916 
Sept.      " 
Mar.,  1917 
Sept.      " 
Mar.,   1918 
Sept. 


t( 


1917 


June, 
Nov. 
May, 
Sept. 
Apr.,  1919 


1918 

il 


Rate 


3^ 

4>^ 

4-5 

3 

5 

6 

4-5 


5 

it 

14 


li 

\& 
tt 

tt 


5 

tt 

5-53^ 

It 
tt 


4H-5 


II 
II 


sy2 

4 

4K 

li 

4^ 


Issue 
price 


95 
100 
9.5-100 


li 


100 
100-lOOH 


Amount 
subscribed 


^Nominal  subscription. 


S7H 

mi 

68.6 
70.8 


97 

93-95 
971^ 
90 

86>^ 


94 

(( 

99 

95 

(( 

tt 

85 


971^ 

981^ 

99 

95-983^ 

95-98 

98 

(< 

/( 
II 


100 

II 

II 
II 
(I 


£ 

332 
592 
941 
48 
516 
161 
372 


3,962 

fr. 
15,205  1 
11,514  1 
14,803  1 
27,853  ^ 

69,375  1 
li. 
1,000 
1,146 
3,014 
3,985 
6,120 

15,266 

ru. 

500 

500 

1,000 

1,000 

2,000 

3,000 

2,500 

10,500 

Mk. 

4,480 

9,106 
12,162 
10,767 
10,699 
12,979 
12,626 
14,789 
10,434 

98,052 

$ 
2,000 
3,908 
4,177 
6,989 
5,250 

22,225 


M 


776 


ESSAYS  IN  TAXATION 


i. 


When  the  United  States  entered  the  war  it  depended  for  the 
time  being  on  temporary  war  certificates.  It  was,  however,  soon 
decided  to  make  a  bold  appeal  to  the  public,  and  in  June,  1917, 
subscriptions  were  invited  to  the  first  Uberty  loan,  which  was 
issued  at  par  bearing  interest  at  the  rate  of  Syi  per  cent.  Al- 
though the  immense  sum  of  2  biUion  dollars  was  raised  by  the 
first  loan,  still  greater  efforts  were  made  in  the  succeeding  loans. 
In  November,  1917,  the  second  liberty  loan  was  issued  and, 
despite  the  original  objections  of  Secretary  McAdoo,  it  was 
found  necessary  to  raise  the  rate  of  interest  to  4  per  cent.  The 
loan  yielded  almost  4  billion  dollars.  In  May,  1918,  the  third 
liberty  loan  was  issued  at  4}^  per  cent  interest,  yielding  over 
4  billions.  The  greatest  effort  was,  however,  made  in  January, 
1918,  when  subscriptions  were  invited  to  the  fourth  liberty 
loan,  bearing  4}4  per  cent  interest,  with  a  result  that  the  un- 
heard of  sum  of  ahnost  7  billion  dollars  was  subscribed.  The 
last,  or  victory  loan,  was  issued  in  April,  1919,  bearing  4%  per 
cent  interest,  and  yielding  about  5}4  billions.  The  consequence 
is  that  almost  the  entire  war  debt  of  the  United  States  consists 
of  relatively  long-time  and  easily  manageable  domestic  se- 
curities.^ In  Table  M  will  be  found  the  relevant  facts  as  to  the 
successive  war  loans  of  the  chief  belligerents. 

Passing  from  the  problem  of  long-time  versus  temporary 
loans,  the  final  question  is  that  of  the  total  indebtedness  of 
the  various  belligerents. 

In  Great  Britain  it  still  seems  to  be  a  question  as  to  whether 
and  to  what  extent  the  loans  to  the  Allies  are  to  be  included  in 
the  war  debt.  The  Chancellor  of  the  Exchequer,  as  stated 
above,  thought  it  prudent  to  include  one-half  of  the  amount. 
The  result  is,  as  shown  in  Table  N,  that  the  British  debt  which 
amounted  to  650  millions  sterling,  or  3,115  miUions  of  dollars, 
just  before  the  war,  rose  by  the  close  of  the  fiscal  year  in  1919 
to  a  total  of  7,643  millions  sterling  or  37,221  millions  of  dollars. 
Inasmuch,  however,  as  the  Chancellor  of  the  Exchequer  as- 
serted in  his  financial  statement  of  April  30,  1919,  that  he  ex- 
pected to  borrow  about  250  millions  sterling,  or  1,217  millions 
of  dollars,  during  the  year  1919-1920,  the  debt  of  Great  Britain 
at  the  end  of  the  fiscal  year  1920  will  amount  to  almost  8  bilUons 

1  A  severe  criticism  of  the  government  policy  of  the  issue  of  loan  antici- 
pation certificates  of  indebtedness  will  be  found  in  J.  H.  Hollander,  War 
Borrowing,  A  Study  of  Treasury  Certificates  of  Indebtedness  of  the  United 
States,  1919. 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     777 


sterling  or  about  39  billion  dollars.  The  war  debt  proper,  there- 
fore, at  the  end  of  that  period  may  be  expected  to  amount  to 
7}4  billions  sterling  or  35  billion  dollars.^ 

Table  N. — Public  Debt  of  Great  Britain 
(In  millions) 


Funded  debt 

Terminable  annuities. .  .  . 

33^  per  cent  bonds 

4}/2  per  cent  bonds 

4  and  5  per  cent  bonds .  . 

National  war  bonds 

Treasury  bills 

Exchequer  bonds 

War  savings  certificates. . 

War    expenditure    certifi- 
cates  

"Other  debts" 

American  loan 

Total 


£ 

587 
30 


13 

20 


650 


Year  ending  March  31 


1914      1915       1916       1917       1918 


£ 

583 

28 

349 


77 
67 


1,104 


£ 

318 
26 
63 

900 


567 

177 

1 


9 

51 

2,133 


£ 

318 

24 

63 

20 

2,119 

464 

320 

74 

24 

317 

51 

4,011 


£ 

318 

22 

63 

16 

2,090 

649 

473 

392 

138 

23 

944 

51 

5,872 


1919 


£ 

318 

22 

.63 

16 

2,090 

1,716 

947 

393 

227 


1,345 
51 
7,643  2 


In  France,  where  the  pre-war  debt  was  32,594  millions  of 
francs  or  6,291  millions  of  dollars,  the  total  debt  at  the  end  of 
1918  amounted  to  167,469  millions  or  32,322  millions  of  dol- 
lars, constituting  a  relatively  more  crushing  burden  than  that 
of  Great  Britam.  The  war  debt  proper  as  will  be  seen  in  Table  O, 
amounted  to  134,875  millions  of  francs  or  26,031  millions  of 

^The  actual  figures  for  March  31,  1920,  were  as  follows:  Gross  Lia- 
bilities £7,875,607,166;  Estimated  Assets  £106,023,346.  Cf.  Return  on 
the  National  Debt.     Cf.  Paper  1024  for  1920. 

2  This  includes  £207  millions  of  sinking  fund  premiums,  which  when  de- 
ducted would  bring  the  net  debt  to  7,435  millions. 

This  total  includes  the  loans  to  the  Allies  and  Dominions: 

(In  millions) 

Russia £    568 

France 434 

Italy 413 

Belgium 87 

Serbia 19 

Other  Allies 48 

Total  Allies £1,568 

Dominions 171 

Total £1,739 


:!l 


i 


II 


^^^  ESSAYS  IN  TAXATION 

dollars.    Inasmuch,  however,  as  it  is  virtually  certain  that  a 

S  r^^riT.T"/^^"  have  to  be  borrowed'^iuring  19  9  and 
1920,  the  total  debt  of  France  directly  and  indirectly  due  to  the 
^^'^V     b  "^  ^^^  ProbabiHty  amount  to  a  much  larger  sum  ' 

1  he  high-watermark  of  the  external  debt  of  France  was 
reached  on  Sept.  30,  1920,  when  it  amounted  to  35,328  million 

3?723'^1H-     \^.'l  '''   ''^'^  ^^^^  ^-^  b^-  reduced    to 
6A72S  milhons.    But  the  mtemal  debt  was  growing  fast. 

Table  0.~Public  Debt  of  France,  December  31,  1918 
Domestic  debt..  d"  million  francs) 

Funded  debt.  .  .' '.  ■.'.'.■. •-•_„_     136,874 

including:  3  per  cent  rentes... '.'. Vq  74R      '  ^ 

5      u      a  i(  l»,/^0 

4    «     (t        a      25,853 

A     ((     u         II       "e  iAiA 12,850 

t       iQ,x     J      of  1918 30,000 

„,     ^.       ,,  "^  and  33^  redeemable ana 

Floatmg  debt ''''^^ 

mcludmg:  national  defense  lx)nds.  .  .  '    "  29  463 

Foreign  debt     "^^^^^^^^^  ^^""^^  Banque  de  France'.' IsioOO 

Funded  debt.".".'.'.'. ._  -_      ^0,595 

including:  advances  from  U.  S." government .  .  Umi 
Anglo-Jrench  loan  in  IT.  S.  1  37(i 

other  loans  from  U.  S i'(io2 

T?i    .-       ,,      Japanese  loan '147 

Floatmg  debt ir  1^. 

Tot'il  15,471 

Pre-war  debt  in  1913. ".".". ^S'S?"f  I'?,^? 

War  debt. .  lof  o?-"*  ^'^^ 

134,875=  $26,031 

In  Italy  the  pre-war  debt  was  13,636  millions  of  lire.    At  the 
end  of  October,  1918,  as  will  be  seen  from  Table  P,  the  total 

S  ToTu'""^  ^^  r,f  ^^  "^'"^^"^  «^  "^^  ^'  somewhat  more 
^nTii  .T'  ""^  '^''"^'''  '"^^^"«  ^^^  ^^^  ^^^bt  proper,  about 

mmT'AlT^  ^^  ^"^^^"^  ^^  ^^"^^^^-  ^y  the  end  of  May, 
1919,  the  debt  had  grown  to  over  77  billions  of  lire  or  15  billions 
of  dollars,  and  the  end  is  not  yet.  This  represents  a  very  dis- 
proportionate  burden  as  compared  with  the  British  figures 

I^or  Germany,  where  the  pre-war  del)t  amounted  to  4  732 
nulhon  marks,  the  figures  are  not  yet  entirely  complete.  Min- 
ister Schiffer  stated  in  February,  1919,  that  the  debt  had  grown 
by  the  end  of  1918  to  157,700  million  marks.  But  Mhiister 
F.rzberger  stated  in  his  Reichstag  speech  of  October  31  1919 
that  the  tot^l  debt  then  amounted  to  2ai  billions  of  marks' 
Jijoa'"''^  "^^^^t^f  war  debt  over  199  billions  of  marks  01^ 
47,726  nullions  of  dollars— the  largest  debt  of  all  the  belliger- 

^  Cf.  the  figures  for  1921,  infra,  p.  780.  • 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET     779 

ents.  It  must  be  remembered,  however,  that  the  great  de- 
preciation of  the  mark  during  the  period  when  most  of  the  debt 
was  contracted  reduces  the  actual  American  equivalent  con- 
siderably. 

Table  P. — Public  Debt  of  Italy,  August  31,  1918 

(In  million  lire) 

Pre-war  debt 13  535 

War  loans \  14737 

Treasury  bonds '  ]  3*052 

Exchequer  bills 9240 

Foreign  advances  from  England  and  the  United  States . '.  13,850 

Advances  from  l^anks q  535 

Notes  issued  by  the  government ]  ]  2^041 

Total 63  093=  512  177 

By  May  31, 1919,  the  total  debt  had  increased  to  .  77^768=  $15^069 

In  Austria-Hungary,  the  pre-war  debt  was  18,354  million 
crowns  or  3,726  million  dollars.  In  August,  1919,  the  new  Aus- 
tria which  by  treaty  assumed  70  per  cent  of  the  total  war  debt 
of  the  old  empire  had  a  war  debt  composed  as  follows:  war 
loans,  35  billion  crowns;  other  war  debt,  llj/^  billions;  bank 
notes,  50  billions,  or  a  total  of  96J^  billions.  At  the  rate  of 
70  per  cent  this  would  make  the  total  war  debt  of  the  old  em- 
pire now  divided  among  various  states,  137,858  million  crowns 
or  28,584  million  dollars.  But  the  same  caution  as  to  the  de- 
preciation of  the  currency  must  be  observed  here. 

Table  Q. — Public  Debt  of  the  United  States 

(In  millions)  Debt  less 

Dfl-te  cash  in 

Apr.  15,  1917 '^rM89 

June  30,  1917 1  qoo 

"   "  1918 ;.;; 109^ 

Oct.  31,  1919  Bonds:  ' 

Pre-war  bonds $      883 

First    liberty  loan $1,985 

Second   "  "    3,526 

Third      "  "    3;904 

Fourth   "  "    6,614 

$16,029 

Notes:  Victory  loan 4,414 

Treasury  certificates 3,736 

War-saving  certificates 911 

Old  debt  on  which  interest  has  ceased 2 

Non-interest  bearing  debt 236 

Total  gross  debt $26,211 

Cash  on  hand '888 

Net  debt $25,323 


780 


fi 


EJS;SAYS  IN   TAXATION 


In  the  United  States  the  total  net  debt  just  before  the  en- 
trance into  the  war,  in  April,  1917,  was  $1,190  millions.  This 
had  increased  by  Oct.  31,  1919,  to  $25,322  millions,  making  a 
war  debt  of  $24, 133  millions.  The  debt,  as  appears  from  Table 
^,  was  composed  almost  wholly  of  war  bonds,  together  with  a 
relatively  small  amount  of  outstanding  treasury  certificates 
Deducting  the  loans  to  Allies,  the  national  debt  amounts  to 
about  15  billions. 

The  other  countries  need  not  be  treated  separately.  In 
lable  R  an  attempt  is  made  to  present  a  summary  picture  of 
the  public  debts  of  all  the  belligerents.  From  this  table  it 
appears  that  the  total  pre-war  debt  amounted  to  over  29  bil- 
lion dollars.  On  the  other  hand,  the  debt  at  the  close  of  the 
war,  mcludmg  that  of  Japan  (whose  debt  was  increased  only 
by  a  part  of  the  funds  raised  to  lend  to  Great  Britain  and 
i^ ranee),  but  not  including  the  debt  contracted  largely  for  in- 
ternal and  non-war  purposes  by  the  Bolshevist  government  in 
Kussia,  amounted  to  almost  228  billions  of  dollars.  This  would 
make  the  net  debt  of  the  world  directly  ascribable  to  the  war 
about  198  billions.^ 

The  debt  of  the  former  belligerents  has  in  some,  cases  been 
steadily  increasing  since  the  close  of  the  war,  notably  in  France 
and  Germany,  and  the  demands  of  reparation  will  lead  to  fur- 
ther prodigious  increase  of  the  German  debt.  By  the  beginning 
of  1921  the  total  debt  of  the  belligerents  had  increased  to  over 
three  hundred  billions  and  the  end  is  not  yet.  In  France  alone 
the  debt,  just  before  the  issue  of  the  new  six  per  cent  loan  in  the 
spnng  of  1921,  amounted  to  245  billion  francs,  (almost  50  bil- 
hons  of  dollars)  or  half  as  much  again  as  the  debt  at  the  date  of 
the  armistice.  Taking  the  limit,  however,  of  from  six  months 
to  a  year  after  the  armistice,  as  is  done  in  this  chapter  the  net 
debt  immediately  caused  by  the  war  and  expended  primarily 
for  the  war  itself,  amounted,  roughly  speaking,  to  about  two 
hundred  billions  of  dollars. 

When  we  compare  this  figure  of  198  billions  of  the  war  debt 
with  the  total  cost  of  the  war,  which,  as  we  have  seen,  amounts 
to  over  210  billion  dollars,  it  appears  that  well-nigh  the  entire 
cost  of  the  war  was  defrayed  from  loans.  The  difference  of 
some  13  billions  derived  from  taxation  is  due  (apart  from  the 
sUghtly   different    dates   utiUzed   for  the  two   computations, 

'  B®  ^*™®  caution  must  here  be  observed  as  that  mentioned  above  on 
p.  757. 


COST  OF  THE  WAR  AND  HOW  IT  WAS  MET       781 


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\: 


it 


and  which  are  responsible  for  two  or  three  bilHons)  almost 
wholly  to  the  efforts  of  Great  Britain  and  the  Unhed  sS 
the  former  raismg  about  7  and  the  latter  about  7^  billions 
from  taxation-Great  Britain  in  a  little  over  four  ^d  a  ha"f 
years  he  Unjted  States  in  a  little  over  two  yea.^  WMe  a 
ew  biUions  additional  were  raised  from  taxation,  as  we  h^ve 
learned,  by  Italy  and  Gemany,  their  contributions  to  the  ex! 
penditures  were  more  than  counterbalanced  by  the  budget  def- 

foi'  V^T  ''"'"''  "'  "'",  "^ '"  ^'^"^«-  It  '^^^^^  true  there- 
fore that  the  war  was  conducted  abnost  entirely  on  credit    The 

outetandmg  problem  now  confronting  every  count.^^  tortus 
^d  conquered  alike,  is  how  to  secure  the  funds  need^  to  dZv 
the  mterest  and  to  provide  for  the  amortization  of  these  giS 
Tie  woM  '  "  ""'  --gnificant  part  of  the  entire'l'S 


INDEX 


Abate,  E.,  cited,  595  n. 

Abatements  of  income  tax  in  Eng- 
land, 457 

Abbott,  W.  G.,  Objections  to  Taxor 
tion  of  Savings  Banks  by,  cited, 
159  J»  » 

Ahgabe,  the,  5 

Abilities  tax  in  Australia,  395 

Ability,  as  a  basis  of  taxation,  3,  10; 
land  as  a  test  of,  11;  tax  on  gross 
produce,  12;  changes  in  test  or 
standard  of,  14  ff.;  tax  on  net 
produce  as  a  test  of,  14;  income  as 
a  test  of,  15,  18;  first  property, 
then  product  the  test  of,  57-58, 
62;  benefit  theory  judged  by 
standard  of,  73-74;  argument  for 
inheritance  tax,  from  increase  of, 
by  reason  of  inheritance,  133-134; 
error  of  relying  on  consumption 
as  a  test  of  320-321;  analysis  of 
principle  of,  338  flf.;  superiority 
of,  to  other  fiscal  theories,  when 
correctly  interpreted,  339-340; 
principle  of,  in  English  inherit- 
ance and  income  taxes,  455-458; 
general  movement  toward,  481 

Absentee  ownership,  sentiment 
against,  94 

Absentees.      See    Non-residents. 

Absorption  theory  of  taxation,  323- 
324,  334-335 

Accidental-income  theory  applied 
to  inheritance  tax,  134-135 

Account  duty  in  England,  453 

Adams,  C.  F.,  Jr.,  cited,  148,  238 

Adams,  H.  C,  quoted,  230;  discus- 
sion of  the  Science  of  Finance  of, 
580-591;  mentioned,  548,  611,  630 

Adams,  T.  S.,  "Mortgage  Taxation 
m  Wisconsin"  by,  105  n.;  cited, 
168,  357  n.,  704  n.;  mentioned, 
367  n.,  702 

Adams-Cooley  plan  of  taxation,  180 
Adequacy  in  taxation,  principle  of, 
383  flf.;  federal  income  tax  con- 
sidered   with    reference  to,  383- 
385;    inheritance   tax   and    cor- 


783 


poration    tax    considered    with 
reference  to,  385-386 

Adickes,  F.,  work  on  Prussian  tax 
system  by,  476  n.;  479  n. 

Adjutorium,  the  term,  5 

Administration  of  taxation,  be- 
ginning of,  and  enforced  partici- 
pation of  individuals  in,  2-3;  im- 
portance of  efficiency  in,  331-333; 
weakness  of,  in  democracies, 
390  ff.  ' 

Ad  valorem  system,  of  railroad 
assessment,  150,  180,  182;  taxa- 
tion of  public-service  corporations 
by,  184;  taxation  of  express  com- 
panies by,  188;  taxation  of  par- 
lor and  sleeping-car  companies 
by,  191;  contrasted  with  earn- 
ings as  a  basis  of  corporate 
taxation,  250  ff.;  danger  of 
arbitrariness  of  administration 
connected  with,  393 

Agens  cases,  cited  in  connection 
with  special  assessments,  417 

Agricultural  property,  the  first 
direct  property  tax  a  tax  on, 
11-12;  overburdening  of,  by  the 
general  property  tax,  28-29 

Aids,  5 

Alabama,  railroad  taxation  in,  179; 
taxation  of  telegraph  companies 
and  other  public-service  corpora- 
tions in,  185,  186,  187,  191,  194, 
195;  absence  of  general  corpora- 
tion tax  in,  211;  license  tax  im- 
posed on  corporations  in,  212; 
taxation  of  property  and  of  stock 
of  corporations  in,  278 

Alberta,  municipal  taxation  in. 
638  n.  ' 

Alerany,  E.  Corbella,  cited,  595  n. 

Alessio,  cited  on  taxation  of  corpora- 
tions in  Italy,  262 

Aliens,  principle  governing  taxation 
of,  119-124 

Alkmoar,    betterments   in,    436   n. 

America,  taxation  in  colonial  16; 
general  property  tax  in,  doomed 


784 


INDEX 


to  failure  56;  reports  on  taxation 

in,  596-640.    *Sce  United  States 
Anderson,  F.  F.,  cited,  715  n. 
Andrews,  C.  A.,  cited,  207 
Angell,  607 

Antoni,  G.,  cited,  111  n.,  262,  306 n 
Apportioned  taxes,  20 
Apportionment      by     expenditure 

method,  359-363 
Apportionment  of  federally  assessed 

taxes  to  the  various  states,  386- 

389 

Appraisal,  taxation  of  railroads  on. 
in  Vermont,  178 

^J^itrariness  in  taxation,  danger  of, 
390  ff. 

Arduino,  work  by,  595  n. 

AiT^yll,  Duke  of,  433  n.;  article  on 
Betterment  Tax"  by,  449  n 

Anstotle,  1,  13 

^^f^ment,  boards  of  equalization 
ot,  21-22,  355;  inequalities  result- 
ing from,  intensified  by  the  single 
tax,  76-77;  of  railroads,  148-151 

A^essments,  monthly,  under  the 
Commonwealth  in  England,  46; 
importance  of  precision  in.  390-^ 

o^'o'^^^^  American  conditions, 
oy3-399 

Athens,  report  of  chamber  of  com- 
merce  tax  committee,  634 

Athens,  taxation  in  ancient,  34 

Aucoc,     Droit     Adrninistralif     bv 
cited,  413  n.  ''       ^' 

Auflage,  the  6 

Aufschlag,  the,  6 

Australasia,  exemption  of  improve- 
ments in,  94,  522  ff.;  recent  tax 

^.o'^)l'''i  ^^^  ffj  land  taxes  in, 
51b-o22;  development  of  income 
tax  m,  531-535;  relation  of  state 
and  federal  finance  in,  535-538- 
war  debts  and  war  finance  in,  781. 
See  New  Zealand 

Australia,  forms  of  taxation  in,  140 
141;  mheritance  tax  in,  456  n.; 
land  value  tax  system  in,  520-521  • 
income  tax  in,  532-3 

Austria,  system  of  corporate  taxa- 
tion in,  249,  263;  taxation  of 
corporations  and  of  security 
holders  in,  305;  war  finance  in,  754 

Ayres,  L.  P.,  cited,  748  n. 


INDEX 


785 


II.. 


Bachelors,  tax  on,  an  example  of 
protective  duty  with  incidental 
revenue,  403 


Bacher,  cited,  126  n. 
Back-tax  theory  applied  to  inherit- 
ance tax,  135 
Bacon,  Francis,  quoted,  46 
Baldwin,  VV.  W.,  cited,  258  n. 

^  r"5Sr'  report  of  tax  commission 
oi,  025 

®^ii!P?r.P**^^^  taxing  securities, 
616,  625 

Bancroft,    Hugh,    The   Inheritance 

Tax  Law  by,  126  n. 
Bank  notes,  tax  on  state,  403 
Banks,  eariy  taxation  of,   145  fT.; 
151-153;    taxation   of,    on   divi- 
dends 151-153;  taxation  on  their 
capital   stock,    153;   taxation  of 
national  and  of  state,   153-154; 
passage  of  national  banking  act 
m  1864,  154;  present  practically 
universal  system  of  taxing,  156- 
157,  160-161;  new  special  corpor- 

?r^".  r^^  ^"'  ^*  fi^^  or  flat  rate, 
157-158;  taxation  of  foreign 
banks,  loan  and  trust  companies, 
and    surety    and    fidelity    com- 

Eames,  159;  taxation  of  savings 
anks,   15^160;  taxation  of,  in 
Pennsylvania,  197-198 
Bar,  L.  von,  cited,  98  n.,  114 
Bank,  750  n.  ' 

Bastable,  C.  F.,  Public  Finance  by. 
cited,  135;  mentioned,  412,  413- 
quoted,  421;  discussion  and  criti- 
cism of  the  Public  Finance  of. 
443  n.,  574-579 
Baumann,  on  term  "betterment 
tax,  433  n. ;  quoted,  440  n. ;  criti- 
cisni  of,  444  n. 
Bavaria,   adoption  of  income  tax 

by,  497 
Baxter  Act  of  1861  in  Scotland,  56 
Beale^  J   H    Jr.,  cited,  144  n. 
Beard,  A.  W.,  cited,  104  n. 
Becu,  T.,  cited,  505  n. 
Bede,  the,  5,  44 
Beer  tax  in  Germany,  501,  502 
Belgium  special  assessments  in.  413 
Beloch,  J.,  cited,  34 
Bemis,  Professor,  611 
Benefit  theory  of  taxation,  71  ff. 

335-336,  436,  444  ff.;  justification 
for,  at  one  time,  72-73;  reasons 
tor  present-day  rejection  of,  73- 
74  336-338;  justification  of,  in 
sphere  of  local  revenue,  by  the 
betterment  tax,  44&-450 
'  Benevolence,  the  term,  5 


Benson,  E,  J.,  cited,  144  n. 
Bentham,     argument     for     inheri- 
tance tax  by,  127-129 
Bequest,  reason  for  introduction  of 
system,  131 

Bequests.     See   Inheritance   tax 

Bernis,  F.,  cited,  595  n. 

Betterment  tax,  the,  433  ff.;  origin 
of,  433-436;  question  whether  a 
true  tax  or  a  local  rate,  436-444; 
theory  upon  which  assessed, 
444  ff.;  details  of  execution  of, 
447-448;  growth  of  system,  448- 
449;  spread  of  principle  in  Europe, 
450.    See  also  Special  assessments 

Beitterment  tax  bills  in  House  of 
Commons,  446  n. 

Bibliographies,  of  the  general  prop- 
erty tax,  63-65;  of  the  taxation 
of  corporations,   142  n. 

Bielfeld,  cited,  51 

Bilinski,  cited,  55  n. 

Black  on  Intoxicating  Liquors,  411  n. 

Black,  C.  C,  cited,   143  n. 

Black,  George  A.,  cited,  449 

Blackett,  B.  P.,  125 

Blackmore,  A.  W.,  The  Inheritance 
Tax  Law,  by  126  n. 

Blackstone,  definition  of  franchise 
by,  221;  mentioned,  399 

Blakey,  R.  Y.,  cited,  715  n. 

Blochmann,  R.,  cited,  116 

Blum,  L.,  cited  and  quoted,  145  n., 
253  n.,  262,  275,  279,  306,  307 

Blumer,  cited,  40 

Blunden,  G.  H.,  cited,  55  n.,  446 

Bluntschli,  theory  of  state  co-heir- 
ship  originated  by,  129 

Boards  for  assessment  of  railroads 
149 

Boards  of  equalization,  21-22,  355 

Boeckh,  cited,  34 

Bogart,  E.  L.,  cited,  144  n.,  715  n., 
748  n. 

Boisguillebert,  quoted,  51  n. 

Boissevain,  G.  M.,  article  by,  467  n. 

Boldt,  D.,  cited,  505  n. 

BoUes,  Albert  S.,  603 

Bondholders  of  corporations,  taxa- 
tion of,  109;  interstate  taxation 
of  non-resident,  285  ff.;  taxation 
of  corporation  and  of,  302 

Boston  commission,  101  n.,  597  n., 
604  n.    See  Massachusetts 

Boston  Executive  Business  Associa- 
tion, 99  n. 

Bothe,  F.  R.,  cited,  43 


Bowers,  L.  W.,  cited,  258 

Boyle,  J.  E.,  cited,  144  n. 

Boyle  and  Davies,  cited,  55  n.. 
441  n.,  443  n. 

Braddon  clause  in  constitution  of 
Commonwealth  of  Australia,  535- 
537 

Bredt,  J.  von,  cited,  505  n.,  508 

Brentano,  cited,  408 

Bridge  companies,  taxation  of,  195 

Brindley,  J.  E.,  95  n.,  144  n.,  360, 
365  n.,  367  n.,  cited.  647  n. 

Briscoe,  J.,  quoted,  48 

British  Columbia,  reports  on  taxa- 
tion of  1919,  637 

Brodtbeck,  C.  A.,  cited,  117 

Brooks,  R.  C,  cited,  505  n.,  511  n. 

Brown,  W.  A.,  cited,  37 

Brunhuber,  R.,  cited,  505  n. 

Bucham,  J.,  cited,  142  n. 

Bucklin,  Senator,  611 

Buffalo,  National  Conference  on 
Taxation  at  (1901),  611 

Building  and  loan  associations, 
taxation  of,  195 

Bullock,  C.  J.,  articles  by,  143  n., 
207  n.;  cited,  357  n.,  361,  367, 
570;  mentioned,  364  n.,  365  n.; 
argument  of,  in  favor  of  Massa- 
chusetts constitutional  amend- 
ment, 620 

Burdett,  E.  W.,  cited,  207 

Burroughs,  W.  H.,  cited,  144  n. 

Business  licenses  or  fees  distin- 
guished from  business  taxes,  410- 
411 

Business  taxes,  327;  in  Canada,  395, 
474;  in  Holland,  467;  in  Prussia, 
474,  475,  479,  480 

Business  transacted,  as  a  basis  of 
taxation  of  corporations,  243 

Cabiati,  749  n.,  195 

Cable  companies,  183 

California,  mortgage-taxation  plan 
in,  104-105;  unit  rule  in  assessing 
railroads  introduced  by,  150; 
present  method  of  taxing  banks 
in,  157;  taxation  of  foreign  banks 
by,  159;  railroad  taxation  in,  175- 
176,  177,  178,  181;  general  cor- 
poration tax  in,  207-208;  rate  of 
license  tax  in,  212;  method  of 
taxing  franchises  in,  229;  separa- 
tion of  state  and  local  revenues 
in,  371-372;  reports  on  taxation, 
614,  636 


1 


786 


INDEX 


;*l 


li^i 


California  Commission  on  Revenue 
and   Taxation,   Report  of,   cited, 

Caligula,  36 

Calkins,  G.,  cited,  207 

Cambridge,  report  of  committee  in 
assessment,  627 

Campbell,  R.  A.,  Mortgage  Taxation 
by,  105  n.,  106  n. 

Canada,  exemption  of  improve- 
ments from  local  real  estate  tax 
m,  94-95;  distinction  between 
taxation  of  corporations  and  of 
mdividuals  recognized  by,  253- 
255;  progress  in  regard  to  federal 
and  state  finance  in,  and  cause 
344-345 

Canal  companies,  early  taxation  of. 
145  if. 

Canale,  quoted,  44  n. 

Canestrini,  cited,  53 

Cannan,  Edwin,  work  by,  54  n  • 

cited,  434,  436;  criticism  of,  441  n' 
Capital,  proposed  single  tax,  on  76 
Capitalization  of  taxation,  334-335 
Capital  stock,  taxation  of  banks  on 

their,  153 
Capital  stock  tax  in  Pennsylvania, 

Capitation  tax,  10 

Capilalio  terremi,  Roman  provincial 

land  tax,  37 
Caracalla,  36,  37 

Car  companies,  taxation  of,  191-192 
Carcano,  749  n. 
Carli,  cited,  44 

Carrett,  James  R.,  cited,  207 
Carucage,  38 
Carver,  339 

Catasto,  Florentine  tax,  53 
Cattle  and  land  taxes,  first  direct 

property  taxes,  11 
Cecil,  Sir  Robert,  cited,  46 
Centralization    of    fiscal    adminis- 
tration, separation  of  state  and 
local  revenues  not  opposed  to- 
367-368 
C^renville,  cited,  570  n. 
Certainty  in  assessment,  importance 

of,  390  flf.  ^ 

Cess,  the,  in  Scotland,  49 
Chamber  of  Commerce  (New  York) 

Committee,  623-624 
Chamberlain,  A.,  749  n.,  759 
Chandler,  H.  A.  E.,  mentioned,  634 
Clmpman,  J.  W.,  Jr.,  work  on  State 
Tax  Commissions,  by  596  n. 


Charieston,  report  on  taxation,  597 
Chattanooga,  report  of  the  chamber 
of  commerce  committee  in  taxa- 
tion, 607 
Cheviot  estate,  464 
Chicago,  yield  from  special  assess- 
ments in  (1890),  414;  report  on 
taxation  in,  621 
Church  rate,  English,  439 
Cities,  effects  of  the  single  tax  on 

conditions  in,  92-95 
Civic   Federation  of  Chicago,   ac- 
count of  tax  commission  reports 
pubhshed  by,  621  n. 
Clamageran,  cited,  38,  44,  51  n. 
Clapperton,  G.,  cited,  143  n. 
Clark,  A.  B.,  638 
Class  antagonisms  over  taxation 

7-8,  9-10,  13-14 
Classification   of   public   revenues, 
399  ff.;  compulsor>'  and  voluntary 
contributions,     400-401;     state's 
powers  of   eminent   domain,   of 
inflicting  fines  and  penalties  or 
power  of   sanction,    and   police 
power   or   power   of   regulation, 
401-402;  the  police  power  vs.  the 
taxing  ix)wer,  402  ff.;  fees,  406- 
413;  special  assessments,  413-421; 
prices,   or  payments  for  certain 
governmental  services,  421-430; 
summary  of  discussion  of,  430-^ 
432;  action  of  Massachusetts  on, 
620-621;  action  of  Kentucky  tax 
commission,  633 
Class  tax  in  Prussia,  475 
Classification  of  property,  642-650; 
classified  property  tax  in  Penn- 
sylvania, 644;  Connecticut,  645; 
Maryland,    645;    Rhode    Island 
645;  Minnesota,  646;  Iowa,  647; 
Kentucky,  648  n.;  unsuitable  for 
New  York,  650;  objections  to,  649 
Clauss,  Th.,  cited,  116 
Clement,  cited,  413  n. 
^l^eland,     reports    in    taxation, 

Cohn,  Gustav,  quoted,  59  n.;  on 
American  tendencies  m  taxation, 
32711.;  cited,  511  n. ;  consideration 
of  Science  of  Finance  of,  547-549 

Coinage,  rights  of,  2 

Colbert,  8 

Cole  law  in  Ohio,  617 

Collateral  inheritance  tax,  137-138; 
advance  of  progressive  rates  in! 
and  reduction  of  exemptions,  MO 


INDEX 


787 


Colletta,  the,  in  Genoa,  44 

Colorado,  rate  of  license  tax  on 
corporations  in,  212;  report  on 
taxation,  611 

Commutation  tax  on  street  and 
electric  railroads  in  Massachu- 
setts, 193 

Confiscation,  rights  of,  2 

Conflicts  between  tax  jurisdictions, 
342-345 

Conigliani,  Carlo  A.,  criticism  of 
General  Theory  of  Effects  of  Taxa- 
tion of,  564 

Connecticut,  inheritance  tax  in, 
122-123;  early  corporation  taxa- 
tion in,  147;  present  method  of 
taxing  banks  in,  157-158;  taxa- 
tion of  savings  banks  in,  160; 
taxation  of  railroads  in,  172,  178- 
179;  effort  to  introduce  appor- 
tionment-by-expenditure method 
in,  363;  separation  of  state  and 
local  revenues  in,  371;  reports  of 
tax  commissions  of,  596,  598, 
599,  600,  607,  632,  636 

Constitutional  restrictions,  doubtful 
value  of,  in  United  States,  344- 
345 

Consumption,  cases  of  opposition 
to  indirect  taxes  on,  7;  as  a  basis 
of  taxation,  113,  114;  not  a  test 
of  ability  under  modem  condi- 
tions, 320-321;  articles  of,  suit- 
able for  federal  revenue  rather 
than  local,  379-380 

Consumption  theory,  the  faculty 
theory  in  reality  a,  339 

Contingent,  the,  in  German  tax 
system,  502 

Contractual  income  of  the  govern- 
ment, 400-401 

Contribution,  original  significance 
of  word,  5 

Contributions,  system  of,  in  Ger- 
many, 498  ff.,  504 

Cooley,  T.  M.,  cited  and  quoted, 
144  n.,  402,  405,  412,  417-418, 
440 

Cooley-Adams  method  of  taxation, 
180 

Corbin,  William  H.,  cited,  363 

Corrie,  quoted  on  exemption  of  im- 
provements in  Queensland,  529- 
530 

Corporate  bonds,  taxation  of,  272 

Corporate  charters,  tax  on,  215- 
218 


Corporate-excess  tax,  in  Massachu- 
setts, 203-204,  205-207,  2133-234, 
638;  extension  of  method  to  Cali- 
fornia, 207-208;  recommended  by 
Michigan  tax  commission,  630 
Corporate  franchise,  223 
Corporation,   development  of  the, 
as  the  typical    form  of  modem 
business  enterprise,  318;  increas- 
ing importance  attached  to  the, 
as  a  source  of  revenue,  328-329 
Corporations,  taxation  of  debts  of, 
106-107;  taxation  of  stockholders 
and    bondholders    of,     107-109; 
taxation  of  property  and  of  capi- 
tal stock  of,  109-110;  taxation  of 
securities  of,  123-124;  literature 
of  taxation  of^  142  n.;  prevailing 
chaos  concerning  subject  of,  142; 
history  of  taxation  of,  145  ff . ;  de- 
velopment of  taxation  of,  148  ff.; 
taxation  of  railroads  and  other 
public-service  corporations,  170- 
195;  taxation  of,  in  certain  states 
by   a    general    corporation    tax, 
195-211;  taxation  by  franchise, 
license,    occupation,   etc.,   taxes, 
211-214;    taxation    of,    through 
the  general  property  tax,   214- 
215,  238;  the  tax  on  corporate 
charters.  215-218;  different  bases 
on  whicn  taxes  on,  are  assessed, 
218-220;  the  franchise  tax,  221- 
238;  cost  of  property  as  a  basis 
of  taxation,  238-239;  assessment 
of  capital    stock    at    its  market 
value,  239-240;  of  capital  stock  at 
its  par  value,  240-241;  of  capital 
stock  plus  the  bonded  debt  at 
the  market  value,  241-242;  gross 
earnings  as  a  basis  of  taxation, 
184-185,  186,  187,  189,  190,  191, 
192,  193-195,  242-243,  292,  579; 
business  transacted  as  a  basis  of 
taxation,  243;  taxation  according 
to  dividends  or  the  capital  stock 
according  to  dividends,  243-245; 
taxation  according  to  net  earn- 
ings, 245-249;  practical  reforms 
necessary  in  taxation  of,  250-264; 
distinction   between    individuals 
and,  in  matter  of  taxation,  253- 
255;    methods    of    taxation    in 
European  countries,  259-264;  le- 
gality of  taxation  according  to 
receipts,   264-270;   double  taxa- 
tion of,  271  ff.;  taxation  of  prop*- 


t 


fl 


I 


li 


r 


788 


INDEX 


erty  and  of  debts,  271-273;  taxa- 
tion of  income  and  of  property, 
273-276;  taxation  of  property 
and  of  stock,  276-280;  double 
taxation  due  to  conflicts  of  juris- 
diction, 280  flf.;  interstate  taxa- 
tion of  corporate  property,  280- 
282;  interstate  taxation  of  cor- 
porate securities,  282-285;  inter- 
state taxation  of  non-resident 
bondholders  or  stockholders,  285- 
292;  interstate  taxation  of  re- 
ceipts or  income,  292-294;  taxa- 
tion of  the  corporation  and  of  the 
security  holder,  297-307;  inci- 
dence of  the  tax  on,  308-311; 
local  taxation  of,  311-314;  conclu- 
sions on  taxation  of,  in  United 
States,  314-315;  interstate  con- 
flicts of  jurisdiction  removable 
by  national  supervision  of  taxa- 
tion of,  345;  suitability  of  tax 
on,  for  federal  system  rather  than 
state  or  local,  380-382;  tax  on, 
considered  with  reference  to  ade- 
quacy in  taxation,  385-386;  fed- 
eral administration  and  state 
apportionment  of  tax,  proposed, 
386-389;  evils  connected  with  ar- 
bitrary assessment  of,  395-397; 
taxation  of,  in  Switzerland,  570; 
Bastable   on   taxation   of,    579; 

Corporation  tax,  in  Switzerland, 
Australia,  and  United  States,  140, 
141;  as  a  means  of  reaching  great 
wealth,  375 

Cort  van  der  Linden,  the  Text-book 
of  Finance  of,  564-565 

Costage,  Scottish  tax,  44 

Cost-of-service  theory  of  inheritance 
tax,  132 

County  boards  of  equalization  of 
assessment,  22 

Cost  of  the  war.    See  War-costs 

Cox,  R.  L.,  cited,  167  n.,  170 

Crammond,  E.,  cited,  748  n. 

Crandon,  F.  P.,  cited,  258 

Credit,  theory  of,  722-724;  private 
and  public,  725-726 

Cridge,  A.  D.,  pamphlet  by,  91  n. 

Crocker,  George  G.,  cited,  98  n. 

Crusaders,  property  tax  levied  to 
aid,  40-41 

Curtis,  George,  Jr.,  cited,  170 

Customs  duties,  origins  of,  3-4; 
suitability  of,  for  federal  rather 
than  state  use,  380 


Dadelszen,  E.  J.  von,  cited,  465 

Damaschke,  A.,  cited,  510 

Dana,  Richard  Henry,  cited,  98  n., 
104  n. 

Danegeld,  38 

Davenport,  H.  J.,  cited,  264,  715  n. 

Davies,  J.  T.,  cited,  143 

Dazio,  the  Italian,  5 

Death  duties.    See  Inheritance  tax 

De  Boer,  J.  A.,  cited,  167  n. 

Debt  exemption  from  taxation,  29- 
31,  102-103,  271-273 

Debts,  taxation  of,  of  corporations, 
271-273;  war,  see  War  Debts 

Decker,    Matthew,    quoted,   48-49 

Decuma,  the,  36 

Defence,  an  essential  consideration 
in  early  theories  of  taxation,  2,  4 

Dehlinger,  A.,  cited,  145  n. 

Delaware,  railroad  taxation  in,  179, 
181;  corporation  taxation  in,  212- 
213;  taxation  of  franchises  in, 
233;  reports  of  tax  commissions 
of,  604,  619,  638 

Denis,  L'Impdt  by,  413  n.,  554-555 

Desty,  R.,  cited,  144  n. 

Dickinson,  J.  M.,  cited,  258 

Diefke,  M.,  cited,  505  n. 

Diehl,  Karl,  cited,  510  n. 

Dietzel,  cited,  144  n. 

Differentiation  of  taxation,  101; 
of  income  tax,  341 

Diffusion  theory  of  taxation,  323- 
324,  334-335 

Diffusion-of-wealth  theory  of  in- 
heritance tax,  130-132 

Digby,  cited,  '^O 

Dinglinger,  F.,  cited,  145  n. 

Dio  Cassius,  37  n. 

Diocletian,  37 

Direct  inheritance  tax,  138 

Direct  taxation,  causes  of  early 
unpopularity  of,  4;  the  last  step 
in  historical  development  of  pub- 
lic revenues,  6;  evolution  of,  into 
an  ordinary  form  of  revenue,  6-7; 
arguments  for  and  against,  7-8; 
points  that  should  govern  our 
attitude  toward,  9  n.;  the  forms 
of,  10  ff.;  poll  or  capitation  tax. 
10;  taxes  on  property  in  land  ana 
cattle,  11;  taxes  on  property  in 
the  produce  of  land,  12;  change  in 
character  of  property  tax  with 
increase    of    personal    property, 

Direct  taxes,  England's  dependence 


l||^ 


INDEX 


789 


on,  483;  amount  of  indirect  taxes 
and,  compared,  483-485 
Direct  and   indirect  taxes  in  the 
United  States,  history  of.  671- 
676  ^      ' 

Dividends,  taxation  of  banks  on 
their,  151-153;  as  a  basis  of  taxa- 
tion of  corporations,  243-245 

Division  of  the  yield,  665 

Divisional  Boards  Act  in  Queens- 
land, 522-523 

^o^iicile,  as  a  basis  of  taxation, 
112,  114;  taxation  of  resident 
aliens  according  to,  119-122 

Donum,  the  term,  5 

Door  and  window  tax,  in  France. 
474  n.  ' 

Double  taxation,  as  a  defect  of  the 
general  property  tax,  29-31;  de- 
fined,  98;   literature  of,   98  n.; 
variety  in  kinds  of,  99;  cases  of, 
by    the    same    jurisdiction    or 
authority,    100  ff.;  justifiable  if 
all  are  assessed  equally;  100;  ele- 
ment of  differentiation  of  taxa- 
tion,   101;  taxation  of  property 
and  of  income  from  same  property 
m  Massachusetts  and  in  Switzer- 
land, 101-102;  question  of  debt 
exemption,  102,  103,  271-273;  of 
case  of  mortgages,    103-107;  in 
corporations  and  of  investors   in 
corporate  securities,  107-109;  of 
property  and  of  capital  stock  of 
corporations,   109-110;  by  inde- 
pendent or  competing  authorities, 
110  ff.;  resulting  from  state  taxa- 
tion of  personalty  wherever  lo- 
cated, 115;  complications  relative 
to  inheritance  tax,  121-122;  dif- 
ferent forms  of,  in  the  case  of  cor- 
porations,   271    ff.;    taxation   of 
property  and  of  debts,  271-273; 
taxation  of  income  and  of  prop- 
erty, 273-276;  taxation  of  prop- 
erty and  of  stock,  276-280;  arising 
from  interstate  taxation  of  corpo- 
rate property,    280-282;  arising 
from  interstate  taxation  of  corpo- 
rate securities,  282-285;  arising 
from  interstate  taxation  of  non- 
resident   bondholders   or   stock- 
holders, 285-292;  arising  from  in- 
terstate taxation  of  receipts  or 
income,    292-294;    arising    from 
taxation  of  the  corporation  and 
of  the  security  holder,  297-307; 


Bastable's  treatment  of  subject, 

o78 

Dowell,  cited,  41,  43,  48,  427  n.  • 
Dryden,  J.  F.,  cited,  166,  179 
Dudley,  A.  S.,  cited,  258 
Dunn,  J.  P.,  Jr.,  cited,  143  n. 

^T^'    E-    D.,   cited,    715    n., 
738  n.,  743  n. 

Dutch,  literature  of  the,  on  taxa- 
tion, 561,  564-565.    See  Holland 

^"ty,  original  significance  of  word 
5;  abolition  of  import,  in  case  of 
adoption  of  single  tax,  77-78 
167     ^^^^^  ^^  °^onograph  by, 


Eammgs,  assessment  of  railroads 
on,  177;  as  a  basis  of  taxation  of 
corporations,  246-249;  contrasted 
with  ad  valorem  system  as  a  basis 
of  taxation  of  corporations,  255  ff  • 
legality  .of  taxation  of,  264-270; 
double  taxation  due  to  interstate 
taxation  of,  292  ff.;  avoidance  of 
evils  comiected  with  arbitrary 
assessment  by  a  tax  on,  393-397. 
See  Gross  Earnings 

Easley,  R.  M.,  627 

Eastman,  F.  M.,  cited,  143  n.,  200  n. 

Eberstadt,  R.,  cited,  436,  508 

Economic  analysis,  influence  of,  on 
fiscal  facts,  320-325 

Economic  interest,   as  a   basis  of 
taxation,  113  ff. 

Edgeworth,  F.  Y.,  mentioned,  339: 
cited,  715  n. 

^??jf"^y  ^  taxation,  principle  of, 
o78— 379 

Einaudi,  cited,  595  n.,  749  n 

€i<r<popd,  Athenian  direct  tax,  34 

Elasticity,   a  cardinal  principle  of 

taxation,  76;  lack  of,  a  defect  of 

the  smgle  tax,  76;  methods  of 

securing    m  state  revenues,  364 

Elder,  S.  J.,  cited,  207 

Electric  light  companies,  taxation 
oi,  194 

Electric  roads,  taxation  of,  in  Mas- 
sachusetts, 204 

Elision  of  taxation,  335 

Ellis,  Guide  to  the  Income  Tax  Acts 
by,  cited,  260,  305 

Ely,  Richard  T.,  20  n.,  600 

Emerson  law  in  New  York,  627 

Eminent  domjiin,  government's 
power  of,  to  secure  revenue.  401 

Engels,  cited,  45 


1 


I 


Ill, 
r 


It 


;  i 


790 


INDEX 


I 


England,  feudal  taxes  in,  38;  later 
media? val  and  modern  history  of 
property  tax  in,  45-49;  local  pro[j- 
erty  tax  in,  becomes  a  land  tax, 
53-54;  taxation  of  cori>orations 
in,  2(50-261,  305;  the  income  tax 
in,  321-322,  384;  the  inheritance 
tax  in,  contrasted  with  that  of 
New  York,  382;  the  betterment 
tax  in,  413,  433  fif.;  extension  of 
inheritance  tax  in,  in  1894,  45^i- 
459;  refonns  of  190<J-1910  in, 
482;  early  and  recent  literature 
on  fiscal  problems  in,  572-579 

Enterprise-for-profit  tax  in  Hawaii, 
057 

Epstein,  J.  H.,  cited,  505  n. 

Equalization  boards,  21-22,  355 

Equal  sacrifice,  principle  of,  338- 
339 

Erzberger,  750  n. 

Escheat,  rights  of,  2;  proposed  ex- 
tension of  principle  of,  by  early 
economists,  to  inheritances  and 
bequests,  127  ff. 

Eschenbach,  cited,  126  n. 

Espinas,  cited,  40 

Estate  duty  in  England,  453-454 

Estimo,  the,  in  Florence,  44,  52-53 

Etymology  of  terms  used  in  taxa- 
tion, 5-6 

Evans,  N.  W.,  citcxl,  144  n. 

Excess  condenmation,  principle  of, 
447 

Excess  profits  tax,  700 

Excise  tax,  applied  to  express  com- 
panies in  Massachusetts,    190 

Excise  taxes,  op}x>sition  to  intro- 
duction of,  in  England,  7-8;  rea- 
sons for  introduction  of,  in  17th 
century,  8-9 

Exemption,  of  improvements  from 
local  real  estate  tax,  93-95;  of  cor- 
porate indebtedness,  272;  of  cor- 
porations from  local  taxation, 
312-313;  undesirability  of,  of 
improvements,  374;  from  income 
tax  in  England,  457;  of  improvc;- 
ments  on  land  in  New  Zealand, 
462,  464r-466;  from  undevel- 
oped land  duty  in  Great  Britain, 
490-491;  from  increment-value 
duty,  492;  from  German  tax  on 
unearned  increment,  512;  of  im- 
provements in  Australasia,  522  ff. 

Expenditure  as  a  basis  of  taxation, 
113,  114 


Expenditures,  war.    See  War  Costs 
Expense,  proposal  of  a  single  tax 

on,  66 
Express    companies,    taxation    of, 

188-191 

Faber,  cited,  408  n. 

Faculty  tax  in  America,  16 

Faculty  theory  of  taxation,  3,  10, 
11  ff.,  15,  18,  57-58,  62-73,  13^- 
134,  320-321,  338  ff.,  455-458 

Fairchild,  C.  S.,  636 

Fairchild,  F.  R.,  cited,  636 

Fankhouser,   N.  C,  cited,   144  n. 

Fairlie,  John  A.,  Report  on  Taxation 
and  Revenue  System  of  Illinois  by, 
629 

Farmers,  disproportionate  share  of 
taxation  borne  by,  28-29,  34^^ 
350;  effects  of  the  single  tax  on, 
86-91;  methods  of  lightening 
burden  of,  as  to  taxation,  375 

Fasolis,  G.,  cited,  98  n. 

Federal  finance,  relations  of  state 
finance  and,  377  ff. 

Federal  inheritance  tax,  139 

Federal  revenues,  relations  State, 
local  and,  660-678 

Fee,  defined,  432 

Fees,  beginnings  of  period  of,  3-4; 
as  a  manifestation  of  the  taxing 
pow^er  of  the  state,  406;  distinc- 
tion between  taxes  and,  407-413; 
distinction  between  special  as- 
sessments and,  418-421;  distinc- 
tion between  prices  and,  426-429 

Feitelberg,  D.,  cited,  144  n. 

Ferries,  taxation  of,  195 

Feudal  system,  forms  of  taxation 
under  the,  38  ff. 

Fifteenth  and  tenth,  origin  of  tax 
called,  41 

Fillebrown,  single-tax  reformer,  75  n. 

Firma  burgi,  the,  38 

Fischer,  J.,  cited,  111  n. 

Flaix,  E.  Foumier  de,  discussion  of 
work  by,  560-561 

Flora,  F.,  cited,  595  n.,  749  n. 

Florida,  railroad  taxation  in,  179; 
reports  on  taxation,  631 

Foldes,  Bela,  cited,  505  n. 

Foote,  A.  R.,  on  taxation  of  corpora- 
tions, 259  n.;  paper  by,  359  n. 

Foreign  banks,  state  taxation  of,  159 

Foreign  corporations,  taxation  of, 
in  New  York  State,  147;  signifi- 
cance of  term,  161  n. 


'^     n 


INDEX 


791 


Foreign-held  Bond  Case,   decision 

of  Supreme  Court  in,  290,  291 
Foreign  insurance  companies,  taxa- 
tion of,  161;  reciprocal  acts  aimed 
at,  162 
France,  taxation  in  mediaeval,  40; 
history  of  general  property  tax 
in,  in  later  mediaeval  and  modem 
times,   50-51;    literature   of,   on 
corporation  taxation,  145  n.;  tax- 
ation of  corporations  in,  261-262, 
306;  absence  of  income  tax  in, 
321;  recent  literature  of,  on  taxa- 
tion, 553-561;  war  expenditures 
m,  753;  war  loans  in,  774;  war 
revenues  in,  760 
Franchise,  definition  of  a,  221-222; 
the  franchise  to  be,  the  franchise 
to  do,  and  the  franchise  to  enjoy 
a  special  privilege,  222-226 
Franchises,  growing  importance  of 

problem  of,  318 
Franchise  taxation,   171,   180-181' 
in  California,   207-208,   637;   in 
various    other    states,    211-214; 
definition  and  discussion  of,  221- 
238;   methods  of  assessment   in 
different  states,  227  ff. 
Francotte,  cited,  34  n. 
Franklin,   Benjamin,   on  difference 
between  a  fee  and  a  tax,  427  n 
Frazer,  M.,  516  n. 
Freeman,  Douglas  S.,  630 
French  system  of  taxation,  390,  395, 

474 
Friday,  D.,  cited,  706  n. 
Friedberg,  R.,  cited,  476 
Friedman,  H.  G.,  Taxation  of  Cor- 
porations  in   Massaccuseetts   bv. 
142  n.,  207  n. 
Fuchs,  cited,  508 

Gabelle,  the,  5 

Galloway,  C.  V.,  cited,  363 

Garfield,  J.  R.,  611 

Gas    comjjanies,   taxation  of,    194 

Gemeiner  Pfennig,  the,  44 

Gemund,  W.,  cited,  508 

General  corporation  tax,  the,  195  ff . ; 
development  of,  in  Pennsylvania, 
195-200;  provisions  of,  in  New 
York,  200-202;  in  Massachusetts, 
202-207;  in  California,  207-208; 
m  New  Jersey,  208-209;  in  Rhode 
Island,  209-210;  in  Ohio  and 
Maryland,  210-211;  taxes  akin 
to,  in  other  states,  211-214 


General  property  tax,  character  of 
the  first,  11;  change  in  character, 
with  increase  of  personal  prop- 
erty,  13-14;  replacement  of,  by 
tax  on  net  product  of  industry, 
14;  course  of,  in  America,  16-17; 
practical  defects  of,   19  ff.;  lack 
of  uniformity,  or  inequality  of  as- 
sessment, 20-22;  lack  of  univer- 
saUty,  22-26;  an  incentive  to  dis- 
honesty,  26-28;   regressivity  of, 
28-29;    double    taxation    under, 
29-31;  in  the  summing-up,  is  a 
dismal  failure,  31-32;  history  of, 
m  antiquity,  32  ff.;  early  mediae- 
val history  of,  38-45;  later  me- 
diaeval  and   modern   history  of, 
45-56;  discussion  of  correctness 
of  theory  of,  56-61;  as  the  main 
source   of   public    revenue    is    a 
failure  historically,  theoretically, 
and  practically,  61-62;  survives 
in    Switzerland,    Australia,    and 
United   States   only,    140;   early 
plan  of  taxing  corporations  ac- 
cording to,    146-148;  objections 
to   taxation  of  corjjorations   by 
method  of,  148;  taxation  of  cor- 
porations   through    a,    214-215; 
abandonment  of,  as  a  personal 
impost,  325;  reasons  for  decay  and 
disappearance  of,  in  Europe,  343; 
general  breakdown  of,  in  United 
States,  348-349;  effect  of  a  fed- 
eral income  tax  on,  385;  attempts 
to    supersede    the,    in    Switzer- 
land, by  other  forms  of  taxation, 
569;  general  dissatisfaction  with, 
showTi  by  reports  of  tax  com- 
missions in  United  States,  628- 
639  ' 

George,  Henry,  67,  68,  97,  464; 
main  errors  in  doctrine  of,  70-71. 
See  Single  tax 
Georgia,  act  of  1805,  for  taxing 
banks,  151;  report  of  tax  com- 
mission of,  634,  637 
Gerloff,    W.,    cited    and    quoted, 

145n.;253n.,  260n.,  295 
Germany,  taxation  in  mediaeval 
towns  of,  39,  44;  progress  of 
general  property  tax  m,  51;  fed- 
edal  laws  in,  regulating  taxation, 
116-117;  literature  in,  on  cor- 
poration taxation,  144  n.;  taxa- 
tion of  life-insurance  companies 
in,  169;  distinction  between  taxa- 


|4 


792 


INDEX 


IM 


i  J 


tion  of  corporations  and  of  in- 
dividuals recognized  by,  253; 
taxation  of  corjiorations  in,  262- 
263;  taxation  of  income  and  of 
property  of  cori>orations  in,  275; 
taxation  of  property  and  of  stock 
of  cori)orations  in,  279;  avoid- 
ance of  double  taxation  arising 
from  interstate  complications  in, 
296-297;  taxation  of  corporations 
and  of  scicurity  holders  in,  306- 
307;  small  proportion  borne  by  in- 
come tax  to  total  revenue  in,  321- 
322;  the  income  tax  in,  384;  spe- 
cial assessments  in,  413;  tax  con- 
ditions and  refonns  in,  473^80; 
refomis  of  1909-1910  in,  496  ff.; 
recent  literature  on  taxation  in, 
543-553;  war  expenditures  in,  753; 
war  loans  in,  754,  775;  war  rev- 
enues in,  762;  Reichskriegssleuer 
in,  514,  n. 

Gladstone,  W.  E.,  332 

Glass,  Secretary,  756  n. 

Goodnow,  articles  by,  cited,  264, 
404 

Goschen,  cited,  54 

Gottliel),  L.  R.,  cited,  748  n. 

Gottlob,  cited,  40 

Gouge,  \V.  M.,  cited,  144  n. 

Grovernmental  enterprises,  pay- 
ments for,  called  prices,  421-430 

Graduation,  of  income  tax,  136- 
137,  341;  principle  of,  applied  to 
inheritance  and  income  taxes  in 
England  (1894),  455-458;  princi- 
ple of,  in  New  Zealand  income 
tax,  461;  apj)lied  to  land  tax  in 
New  Zealand,  462-464;  of  income 
tax  in  England  (1909),  486-488; 
of  taxation  in  Switzerland,  571; 
of  income  tax  in  U.  S.,  ch.  xxii 

Graliam,  W.  J.,  cited,  169 

Grain  elevators,   taxation  of,    195 

Grandjeen,  N.,  G.,  cited,  434  n. 

Grants-in-aid,  458 

Graziani,  A.,  work  by,  595  n. 

Great  Britain,  reforms  in  taxation 
in  (1909-1910),  482  ff.;  causes  of 
increased  expenditures  in,  neces- 
sitating increased  revenues,  482- 
483;  new  land  taxes  in  (1909), 
488-495;  war  revenues  in,  771; 
war  expenditures  in,  760;  war 
loans  in,  775.    See  England 

Greece,  taxation  in  ancient,  34 

Grice,  J.  Watson,  cited,  458, 483, 495 


Griziotti,  B.,  cited,  715  n. 

Gross  earnings  (or  receipts)  system 
of  taxation,  of  telegraph  com- 
panies, 184-185,  186;  of  telephone 
companies,  186,  187;  of  express 
companies,  189,  190;  of  parlor 
and  sleeping-car  companies,  191; 
of  street  railways,  192,  193;  of 
other  public-service  corporations, 
193-195;  discussion  of  assess- 
ment of  corporations  by,  242-243; 
double  taxation  due  to  interstate, 
292  ff.;  deprecated  by  Bastable, 
579 

Gross  Receipts  Tax  cases,  court  de- 
cisions in,  264  ff. 

Guiraud,  P.,  cited,  34  n. 

Gutzeit,  O.,  cited,  508 

Gukovski,  750  n. 

Guyot,  Yves,  consideration  of  The 
Income  Tax  of,  556-558 

Hab-,  Gut-,  und  Kopfsteuer,  40 
Habitation  tax  in  Massachusetts, 

607 
Hansel,  P.,  cited,  126  n. 
Haig,  R.  M.,  cited,  595  n.,  703  n. 

706  n.,  mentioned  637,  638 
Hall,  B.  E.,  monograph  on  Special 

Franchise  Tax  Law  by,  226  n. 
Hallgarten,  cited,  441  n. 
Hallowell,  J.  M.,  cited,  207 
Hamilton,  Alexander,  8;  the  golden 

maxim  of,  on  evils  of  taxation  of 

btisiness  capital,  350;  mentioned, 

672,  674 
Hammond,  J.  H.,  cited,  143  n. 
Harcourt,  Sir  William,  458,  459,  475 
Harrison,  Charles,  440  n.,  442  n. 
Hartung,  cited,  42 
Hartwig,  cited,  43  n. 
Hawaii,  repMDrt  of  tax  commission  of 

(1908),  619,  636 
Heating    and    cooling    companies, 

taxation  of,  194,  195 
Hecht,  F.,  cited,  144  n. 
Heckel,    cited,    102;    criticism    of 

work  by,  107  n.,  595  n. 
Hedley,  cited,  55  n. 
Heidenhain,  M.  E.,  studies  in  taxa- 
tion by,  39  n.,  41,  43  n. 
Helferich,  cited,  307 
Helfferich,  750  n. 
Heriot,  the,  121 
Hesse,  A.,  cited,  501 
Hewegisch,  cited,  36  n. 
Hidage,  38 


INDEX 


793 


<<""■—• 1' 


Higgs,  H.,  cited,  595  n. 

Hill,  J.  A.,  cited,  475 

Hillhouse,  T.  J.,  cited,  155 

Hills,  Thomas,  Address  on  Taxation 
by,  104  n. 

Hines,  611 

Hjelp,  the,  5 

Hobson,  J.  A.,  cited,  595  n. 

Hobbes,  1,  8 

Hoffmann,  cited,  44,  51,  167  n. 

Holcomb,  A.  E.,  cited,  143  n.,  259  n. 

Holden,  Sir.  E.,  cited,  748  n. 

Holland,  the  home  of  the  excise  tax, 
9;  the  general  property  tax  in, 
40,  44-45,  51-52;  tax  reforms  in, 
466-473;  recent  literature  in,  on 
taxation,  561,  564-565 

Hollander,  Professor,  cited,  595  n., 
625 

Hopkins,  S.  M.,  Speech  on  Subject 
of  Taxing  Bank  Stock  by,  153  n. 

House  of  Commons,  on  the  better- 
ment tax,  445-446;  history  of 
betterment  bills  in,  446  n. 

Houses,  proposal  of  a  single  tax  on, 
66 

House  tax  in  Prussia,  ^  474,  479 

Housing  problem  in  Germany,  507- 
508 

Housing  and  Town  Planning  Act 
of  1909,  449 

Howe,  F.  C,  article  by,  143  n. 

Howe,  S.  F.,  cited,  21  n. 

Huebner,  S.  S.,  article  by,  167  n. 

Hiillmann,  cited,  44 

Hunter,  Roman  Law  by,  cited,  290 

Hunter,  M.  H.,  cited,  143  n.,  595  n. 

Hurrell,  Aflred,  cited,  166 

Huschke,  cited,  36 

Huxley,  essay  on  "Natural  Rights" 
by,  70  n. 

Idaho,  taxation  of  banks  in,  157 
Illinois,  method  of  taxing  franchises 

in,  229;  decision  on  special  assCvSS- 

ments  in,  418  n.;  reports  of  tax 

commissions  of,  601,  629 
Impost,  significance  of  word,  5 
Impot  unique,  the,  79 
Improvements  on  land,  exemption 

of,  in  New  Zealand,  462,  464- 

466 
ncidence,  of  the  corporation  tax, 

308-311;  Bastable's  discussion  of, 

of  taxation,  578 
Income,  as  a  basis  of  taxation,  15; 

proposed  single  tax  on,  66;  double 


taxation  of,  and  of  interest  on 
debt,  in  case  of  corporations,  272; 
taxation  of,  and  of  property,  273- 
276 

Income  tax,  15-16,  18;  elasticity  of 
the,  76;  differentiation  in,  101; 
deduction  for  indebtedness  under 
an,  103;  determining  principle 
in  case  of  non-resident  citizens, 
118-119;  inheritance  tax  as  sup- 
plementary to,  134;  small  propor- 
tion actually  borne  by,  to  total 
revenue,  321-322;  a  result  of  ele- 
ments involved  in  the  faculty 
theory,  341;  modifications  of,  by 
principles  of  graduation  and  of 
differentiation,  341;  will  become 
in  the  future  a  national  rather 
than  a  state  tax,  345;  as  a  means 
of  reaching  great  wealth,  375; 
suitability  of,  for  federal  adminis- 
tration rather  than  state,  379, 
380,  382,  383;  a  federal,  con- 
sidered with  reference  to  principle 
of  adequacy  in  taxation,  383-385; 
federal  administration  and  utiliz- 
ation of,  proposed,  388-389;  de- 
gressive principle  in,  in  England, 
457;  in  New  Zealand,  459-461; 
in  Holland,  467  ff.;  in  Prussia, 
475  ff.;  in  France,  482,  555- 
557;  stoppage-at-source  system  in 
Great  Britain,  485-486;  features 
of  tax  of  1909,  in  England,  486- 
488;  in  Germany,  497,  515;  in 
Australia,  531-535;  lessons  to  be 
learned  by  United  States  con- 
cerning, 542;  source  of  idea  of 
differentiation  of  the,  555;  in 
Switzerland,  569,  570;  in  Massa- 
chusetts, 659;  recommended  for 
New  York,  651-659;  during  the 
war,  693-700 

Increment-value  taxes  on  land,  in 
Great  Britain,  491^92;  in  Ger- 
many, 505  ff.,  510-515 

Indiana,  method  of  taxing  fran- 
chises in,  229;  new  taxation  law 
of,  629;  report  of  tax  commis- 
sion of,  635 

Indirect  taxation,  rise  of,  3-4;  direct 
taxation  versus,  6-10;  cases  of 
opposition  to,  7;  origins  of,  in 
Holland,  9;  points  to  be  con- 
sidered in  our  attitude  toward, 
9  n.;  imported  into  American 
middle  colonies,  16-17;  problem 


^.^IJ^-r^Lj-^-r-,  -:._--  ,-^--  _   - 


'j    I 


if  I 


!l"i 


794 


INDEX 


of  reforni  of,  325;   proportion  of 
direct  taxation  and,  in  England, 
483  ff.;  reliance  uj>on,  under  Ger- 
man system,  49tK504;  dependence 
of  Australasia  upon,  516  ff.,  535- 
537,  539;  history  of,  in  the  United 
States,  671-676 
Individual,  test  of  obligation  of,  to 
contribute  to  support  of  govern- 
ment, 335  ff. 
Industrial  democracy,    changes   in 
fiscal  methods  effected  by,  451  ff. 
Inequahty  of  assessment  a  defect 

of  general  property  tax,  20-22 
Inflation  as  due  to  loans  or  taxes, 

731>-741 
Inheritance,   desirability  of,  as  an 

institution,  131 
Inheritance  tax,  international  com- 
plications over,   121;  problem  of 
double    taxation    in    coimection 
with,  121-122;  essentially  a  pro- 
duct of  modern  democracy,  126; 
reasons  for  favor  shown  to,  by 
democracy,    127;    earliest    argii- 
ments  for,  involving  alx)lition  of 
intestate  successi(m,  127  ff.;  the 
theorj^  of  state  co-heirship,  129- 
130;  the  socialistic  or  diffusion-of- 
wealth  theory,  130-132;  so-called 
cost-of-service  theory,  132;  viewed 
as   a   charge  on  the  mere  priv- 
ilege of   succession,  132-133;  in 
the   final,    correct    view,    to    l^e 
regarded  as  a  direct  tax  on  the 
recipient     of     the     inheritance, 
133  ff.;  accidental-income  theory 
applied    to,    lM-135;    back-tax 
theory  and,   135;  view  of,  as  a 
capitalized   hicome   tax  paid   in 
one  lump,    135-1.%;  accidental- 
income  argmnent  the  logical  de- 
fence for,   136;  collateral  inheri- 
tance tax,    137-138;  application 
of  thwry  of  progression  to,  137, 
138-140;   introduction  of  direct 
inheritance  tax,    i;i8;   spread  of 
progressive    principle,     138-147; 
desirability  of  national  supervi- 
sion of,  M5;  a  state  and  not  a 
local  tax,  354;  possibilities  as  a 
source  of  state  revenue,  358;  vari- 
ation of  rate  of,   to  secure  elas- 
ticity in  state  revenues,  364;  a 
principal  means  of  reaching  great 
wealth,    375;   suitabihty   of,    for 
federal  administration  rather  than 


state,  380,  382;  conclusions  con- 
cerning, when  viewed  with  refer- 
ence to  adequacy  in  taxation, 
38^386;  federal  administration 
and  state  apportionment  of,  pro- 
posed, 38(>-389;  extension  of,  in 
England  in  1894,  453-459;  in 
Prussia,  475;  progressive  prin- 
ciple applied  to,  in  England,  487; 
m  Germany,  499,  500,  504,  515; 
m  Australasia,  531-535;  in  United 
States,  542;  in  Switzerland,  571; 
m  Massachusetts,  606;  in  New 
York,  616 

Insurance  companies,  early  taxation 
of,  145  ff.,  161;  kinds  of  com- 
panies taxed  in  different  states, 
162-163;  discrimination  in  case 
of  life-insurance  companies,  163; 
taxation  of  life-insurance  com- 
panira,  166-170 

Insurance  projects  in  England,  482- 
4o3 

Internal  revenue,  receipts  1915- 
1921,  700-714 

International  relations,  principles 
governing  taxation  under,  114, 
116-117,  118-121 

International  Tax  Association,  20  n. 
123  n. 

Interstate  commerce  and  franchise 
taxation,  236 

Interstate  conflicts  of  jurisdiction, 
possibility  of  removal  by  na- 
tional supervision  of  state  taxes. 
345 

Interstate  taxation,  of  corporate 
property,  280-282;  of  corporate 
securities,  282-285;  of  non-resi- 
dent bondholders  or  stockholders, 
285-292;  of  corjjorate  receipts  or 
income,  292-294 

Intestate  inheritance,  proposed  abo-  ' 
lition  of,   127-130 

Inventory,  institution  of  the,  in 
Switzerland,  570-571 

Iowa,  exemption  of  improvements 
from  taxation  in,  95  n.;  taxation 
of  banks  in,  157;  reports  on 
taxation,  604,  631 

Italy,  general  property  tax  in 
mediaeval  republics  of,  44;  de- 
velopment of  property  tax  in, 
m  later  times,  52-53;  taxation  of 
corporations  in,  262;  taxation  of 
corporations  and  of  security  hold- 
ers in,  305-306;  recent  literature 


INDEX 


795 


of,  on  taxation,  561-564,  595  n. 
war  expenditures  in,  754;  war 
loans  in,  774;  war  revenues  in,  762 

James,  President  E.  J.,  629 
Japan,  indirect  taxes  in,  334 
Jaramillo,  E.,  cited,  595  n. 
Jardim,    Pereira,    the    Science    of 

Finance  of,  566 
Jastrow,  J.,  cited,  475,  476 
Jeze,  Gaston,  work  by,  595  n.;  cited, 

748  n. 
Johnson,  A.  S.,  cited,  97  n. 
Jones,  R.,  cited,  595  n. 
Judson,  F.  M.,  cited,  143  n.,  144  n.; 

mentioned,  611 
Jugatio,  Roman  provincial  land  tax, 

37 
Justi,  distinction  between  fees  and 

taxes  by,  407 

Kales,  Albert  M.,  Compilation  of 
Tax  Laws  and  Judicial  Decisions 
of  Illinois  by,  611,  143  n. 

Kansas,  report  of  tax  commission 
of,  612 

Keller,  cited,  505  n. 

Kennedy,  W.,  cited,  55  n.,  595  n. 

Kentucky,  taxation  of  banks  in, 
153;  taxation  of  franchises  in, 
211,  229;  local  corporate  franchise 
tax  in  addition  to  general  prop- 
ery  tax  on  corporations  in,  312; 
reports  on  taxation,  620,  632,  635 

Kiauchau  experiment,  the,  506-508 

Kinley,  Professor,  629 

Klotz,  749  n. 

Knibbs,  G.  H.,  cited,  516  n. 

Koenig,  Gustave,  discussion  of  A 
New  Income  Tax  by,  555-556 

Kolle,  cited,  42 

Konstam,  E.  M.,  cited,  55  n. 

Koppe,  H.,  cited,  511 

Kramer,  H.,  cited.  111  n. 

Kruger,  cited,  126  n. 

Kuhn,  749  n. 

Kumpmann,  K.,  cited,  505  n. 

Laboring  class,  increasing  economic 

importance  of  the,  317 
Labor  theory  involved  in  single-tax 

theory  of  propery,  69-70 
Lactantius,  quoted,  37  n. 
Land  and  Income  Assessment  Act 

in  New  Zealand,  459 
Lamlbede,  the,  5,  44 
Landschoss,  the,  44 


Landsieuer,  the,  44 

Land  tax,  11;  expansion  of,  into  a 
general  property  tax,  32-33;  in 
ancient  Athens,  34;  in  ancient 
Rome,  35,  36,  37;  in  mediaeval 
England,  38;  under  early  feudal 
system,  38;  in  mediaeval  German 
towns,  39;  English  general  prop- 
erty tax  of  17th  century  becomes 
a  mere,  47^9;  history  of  course 
of  the,  49;  under  modern  single- 
tax  schemes,  67-68;  in  New  Zea- 
land, 461  ff.;  recent  enactments 
concerning,  in  Great  Britain, 
V88  ff.;  new  British  (1909),  488  ff. 
undeveloped-land  duty,  490-491; 
the  increment-value  duty,  491- 
492;  reversion  duty  on  land,  492- 
493;  in  Austraha,  516-522 

Land  values,  modern  scheme  of  a 
single  tax  on,  67-68 

Lane,  J.  A.,  cited,  101 

Land,  cited,  44 

Lassalle,  quoted,  8 

Law  Bonar,  746  b.,  749  n. 

Layton,  A.  T.,  cited,  45e 

Leeman,  on  special  assessments  in 
Belgium,  413  n. 

Leffingwell,  740  n.,  746  n. 

Legacy  duty  in  England,  453,  455 

Legality  of  taxation  of  corporations 
according    to    receipts,    264r-270 

Lehr,  E.,  cited,  98  n.,  114 

Leidig,  cited,  413  n. 

Leland,  S.  E.,  cited,  144  n. 

Lenschmann,  cited,  501 

Le  Rossignol,  J.  E.,  investigations 
by,  530  n. 

Leroy-Beaulieu,  quoted,  32  n.;  men- 
tioned, 413,  544,  555;  cited,  595  n. 

Levasseur,  cited,  37 

Lewald,  cited,  263,  307 

Lex  Huene  of  1885,  in  Prussia,  477 

License  or  privilege  system  of  taxa- 
tion, 17;  taxation  of  railroads  by, 
179-180;  of  telegraph  companies, 
186;  of  express  companies,  190; 
of  parlor  and  sleeping-car  com- 
panies, 191;  of  gas  and  electric 
companies,  194;  of  other  pubUc- 
service  corporations,   194-195 

License  taxes,  distinction  between 
license  fees  and,  411 

Lieppert,  F.,  cited,  98  n. 

Liessmann,  E.  M.,  Compilaiion  of 
Tax  Laws  and  Judicial  Decisions 
of  Illinois  by,  143  n. 


♦ 


i'A 


796 


INDEX 


I 


n 


life-insurance  companies,  taxation 

.of,  163,  166-170 
Lighting    and    watching    rates    in 

England,  441-442 
Lindahl,  E.,  cited,  595  n. 
Liquor   licenses,    alx)lition   of,    by 

adoption  of  the  single  tax,  78; 

high,  are  taxes  and  not  fees,  412 
Liquor-license   tax,   administration 

of,    by   state   officials,    353-354; 

amount  of  revenue  from,  in  New 

York,  358;  success  of  transfer  to 

state,  378 
Literature  on  taxation,  543-595 
Lloyd-CJeorge,  H.,  budget  of  1909 

of,  482-496;  cited,  749  n. 
Loan  companies,  taxation  of,   159 
Loans,    tax   on,    in    Pennsylvania, 

198-199  ' 

Loans  versus  taxes  in  war  finance 

715-747  ' 

Loans,   disadvanatages  of,   736  n 
Local  option  in  taxation,  359-360, 

Local  property  tax,  history  of,  in 

Europe,  53-56 
Local  revenues,  separation  of  state 
revenues  and,  347  ff.    See  under 
Reparation. 
Local  revenue  system,  reform  of  in 
Prussia,  473,  477-480;  in  Switzer- 
land, 571-572 
Local  taxation,  of  corporations,  311 
314;  assuming  more  and  more  the 
form  of  a  tax  on  real  estate,  343- 
344;  recognition  of  weakness  of, 
shown  by  reports  of  tax  commis-. 
sions  m  United  States,  596  ff. 
Location  of  property,  taxation  ac- 
cording to,  112-113 
Loening,  citetl,  413  n. 
London  County  Council  Improve- 
ments Act  of  1897,  448 
Loirain,    Jacques,     the    Financial 

Refonn  by,  558-559 
Lotz,  W.,  cited,  595  n. 
Louisiana,  inheritance  tax  in,  133; 
taxation  of  banks  in,  153;  rejiorts  ; 
on  taxation,  617,  637,  638  ' 

Lump-sum  income  tax,  485 
Lutz,  H.  L.,  mentioned,  637;  cited, 

21  n. 
Lynn,  Grey,  quoted,  528 


McCulloch,  551,  553,  573 
Machiavelli,  cited,  53 
McDonald,  E.  L.,  cited,  106  n. 


McVey,     Professor,     chairman    of 
Mmnesota  tax  commission,  595  n. 
Madox,  cited,  38 

Maine,  inheritance  tax  in,  122;  taxa- 
tion of  savings   banks  in,    160; 
taxation  of  insurance  companies 
^J^^^^'  I'ailroad  taxation  in, 
173, 177,  181 ;  annual  franchise  tax 
on  corporations  in,  213;  reports 
of  tax  commissions  of,  601,  618 
Magarmos,  R.  M.,  cited, 
Majarano,  S.,  cited,  595  n. 
Ma  e,  Bureau  de  la,  cited,  36  n. 
Mallet,  Bernard,  report  by,  505  n. 
Manes,  cited,  41  n. 
Mangoldt,  K.  von,  cited,  508 
Mamtoba,  report  on  taxation,  637 
Manufacturing  corporations,  taxa- 
tion of,  m  Pennsylvania,  19^200: 
in   New   York,   200;   in   Massa- 
chusetts, 204-205 
Marin,  L.,  cited,  748  n. 
Marquardt,  cited,  35,  36  n. 
Marsh,  Benjamin  C,  cited,  93 
Marsilj-Libelli,  cited,  715  n. 
Maryland,    taxation   of   banks   in, 
15b;  taxation  of  insurance  com- 
panies in,  161;  railroad  taxation 
m,    173,    177,    178,    181;   general 
corporation     tax     in,     210-211; 
taxation  of  property  and  of  stock 
of  corporations  in,  278;  reports  of 
tax  commission,  601,  606,  632 
Massachusetts,   income  and  prop- 
erty taxation  in,  101;  mortgage- 
taxation  plan  in,  104-105;  inherit- 
ance tax  m,  122;  taxation  of  non- 
residents, 123;  early  corporation 
taxation  in,  147;  acts  for  taking 
banks  in,  151,  153,  157;  taxation 
of  savmgs  banks  in,  159;  taxation 
of  insurance  companies  in,  161- 
162,    165;   railroad   taxation   in, 
178,  181;  general  corporation  tax 
in,    202-207;    tax    on   corporate 
charters    (incorporation   fee)    in, 
216;  taxation  of  property  and  of 
stock    of    corporations   in,    276, 
278-279;  reports  of  committees 
and  commissions  of,  on  taxation 
598,  599,  606,  615,  617,  620,  634,' 

Mathematical  rules  in  assessment 

of  real  estate,  394 
Mathews,  J.  M.,  cited,  368 
Matncular-Beitrage    in    Germany, 

498  ff.,  504,  666  * 


III!  *' 


INDEX 


797 


Matthews,  Nathan,  Jr.,  article  by, 

104    n.;    argument    of,    against 

Massachusetts         constitutional 

amendment,  620 

Matthias,  cited,  35 

Mazzola,  Ugo,  discussion  of  work  on 

taxation  by,  562-563 
McKenna,  749  n. 
Meier,  cited,  263 
Meili,  G.  S.,  cited,  144  n. 
Menier,  single  tax  on  capital  advo- 
cated by,  67  n. 
Merchants'       Association       (New 

York),  reports  of,  623 
Merriam,    C.    E.,    report    by,    on 

municipal  taxation,  621 
Merrill,  John  T.,  cited,  143  n. 
Messenger   and   signal   companies, 

taxation  of,  195 
Methodology  in  book  by  Dr.  Ump- 

fenbach,  544-545 
Meyer,  Christian,  cited,  40 
Meyer,  Ed.,  cited,  34  n. 
Michelson,  cited,  595  n. 
Michigan,    mortgage    taxation    in, 
105;   railroad  taxation   in,    174- 
175,  180;  method  of  taxing  fran- 
chises in,  230-232;  report  on  taxa- 
tion, 630 
Middle  Ages,  an  inheritance  tax  in 

the,  126 
Mileage,  taxation  of  telegraph  com- 
panies   according    to,     185-186; 
taxation  of  telephone  companies 
by,    187-188;    of    express    com- 
panies,   189-190;  of  parlor  and 
sleeping-car   companies,    191;  of 
street  railways,  192 
Military  service,  liability  to,  3 
Mill,  J.  S.,  an  adherent  of  principle 
of  differentiation  of  taxation,  100; 
plan  of,   concerning  inheritance, 
130-131;  and  sacrifice  theory  of 
taxation,    33^339,    496;    avoid- 
ance   of    practical    problems    of 
taxation  by,  573 
Miller,  E.  T.,  cited,  144  n. 
Miller,  J.  D.,  cited,  97  n. 
Mineral-rights  duty  in  Great  Brit- 
ain, 493 
Mineral  way  leaves,  493  n. 
Minimum  sacrifice,  principle  of,  339 
Minnesota,    railroad    taxation    in, 
175-176,  177,  178;  report  of  tax 
commission  of,  612 
Miquel,  Dr.,  Prussian  finance  min- 
ister and  fiscal  reformer,  476-480 


Mississippi,    railroad    taxation    in, 

report  on  taxation,  636 
Missouri,    mortgage    taxation    in, 

105  n. ;  reports  of  tax  commissions 

of,  613,  615 
Moll,  Bruno,  work  by,  39  n.;  cited, 

40,  41,  43  n.,  55  n. 
Monopoly   profits,    failure   of    the 

single  tax  as  to,  81-82 
Moore,  J.  R.,  cited,   143  n. 
Montana,  report  of  tax  commission 

of,  637 
Morrill,  Willard,  cited,   167 
Mortgage   bonds,  taxation  of,  106 
Mortgage-recording  tax,   106;  pre- 
cision gained  in  assessment  by 

the,  395 
Mortgages,  taxation  of,  25,  31,  103- 

107,  608,  trend  toward  indirect 

taxation  shown  by,  334;  proposed 

for  New  York,  608 
Municipal  reports  on  taxation,  621 
Murray,  R.,  cited,  595  n.,  621 
Muyden,  B.  van,  cited,  117 

National  banking  act  of  1864,  154 

National  banks,  taxation  of,  153- 
155 

National  Conference  on  Taxation 
at  Buffalo  (1901),  611 

Nationalization  of  wealth,  move- 
ment in  direction  of,  318-319 

National  Tax  Association,  123,  628; 
results  of  annual  conferences  of, 
640 

Natoli,  F.,  cited,  145  n.,  505  n. 

Natural  rights,  doctrine  of,  69-70 

Naval  estimates,  increase  in,  in 
England,  482 

Navigation  companies,  183  195 

Nebraska,  definition  of  public- 
service  corporations  in,  183;  re- 
port on  taxation,  633 

Necker,  cited,  51 

Net  earnings,  as  a  basis  of  taxation 
of  corporations,  245  ff.;  difficulty 
of  defining  term,  246-249;  the 
best  system  for  taxing  corporate 
property,  259  ff. 

Netherlands,  general  property  tax 
in,  40,  44-45,  65-52 

Net  product,  taxation  of,  15 

Neiimann,  F.  J.,  cited,  51,  145  n.; 
distinction  between  fees  and  spe- 
cial assessments  by,  421  n.;  dis- 
cussion of  writings  on  taxation  of. 
545-546 


I 


lit 


I  f 


I'P 

i  i 

1 
\  1 

798 


INDEX 


New  Amsterdam,  projected  tax  on 
unimproved  lands  in,  95  n. 

Newcomer,  M.,  cited,  357  n.,  376  n. 

New  England  colonies,  taxation  in, 
16 

New  England  states,  taxation  of 
savings  banks  in,  159-160 

New  Hampshire,  taxation  of  savings 
banks  and  deposits  in,  159,  233; 
reports  of  tax  commissions  of, 
598,  604,  618,  635 

New  Jersey,  taxation  of  banks  in, 
151,  156-157;  railroad  taxation 
m,  173-174,  182,  632-633;  general 
corporation  tax  in,  208-209; 
method  of  taxing  franchises  in, 
228;  tendency  to  centralization 
of  tax  administration  in,  368  n.; 
reports  of  special  tax  commis- 
sions of,  598,  599,  607,  613,  631, 
ooo; 

New  Mexico,  report  of  tax  com- 
mission, 638 
New  South   Wales,   land  taxation 
m,  517,  520;  exemption  of  im- 
provements in,  526,  527;  income 
tax  in,  532 
New  York  City,  yield  from  special 
assessments  in   (1891),  414;   in- 
vestigation and    reports  on  tax 
prolileins  of,  622,  624 
New   York   State,   figures  of  real 
estate  and  personal  property  tax 
m,  24,  25;  taxation  of  non-resi- 
dents by,  123;  inheritance  tax  in. 
137  n.,   138,   139;  first  state  to 
enact  corporation  tax  law  (1823), 
146;  history  of  early  corporation 
taxation  in,  146-147;  taxation  of 
banks  in,  153,  157,  159;  complex- 
ity of  rate  of  insurance  taxation 
in,  163-164;  taxation  of  railroads 
in,  171-172,  178,  181;  definition 
of  public-service  corporations  in, 
183;  general  corporation  tax  in, 
200-202;  franchise  tax  in,  225- 
226;  assessment  of  capital  stock 
at  its  market  value  in,  239-240; 
taxation  of  property  and  of  stock 
of  corporations  in,  278;  local  taxa- 
tion of  corporations  in,  312,  313; 
evolution  in  assessment  of  real 
estate  in,  326-327;  separation  of 
state  and  local  revenues  in,  369- 
371;  evils  connected  with  arbi- 
trary assessment  of  corporations 
in,  395-396;  mortgage-tax  prop- 


osition for,  603-609;  reports  of 
commissions  of,  on  taxation,596. 
597,  598,  599,  605,  609,  615;  tai 
refonn  in,  650-659 

New  York,  Report  of  Special  Tax 
Commission  o/,  137  n.,  624,  627 

New  York  Tax    Reform  Associa- 
tion, 105  n.,  624 

New  Zealand,  provisions  connected 
with  progressive  taxation  in,  448; 
income  tax  in,  459-461;  532 
534  n.;  land  tax  in,  461  ff.;  un- 
founded claims  of  single  taxers 
concerning,  4(54-466;  later  land 
tax  reforms  in,  517-520;  exemp- 
tion  of  improvements  in,  524-526 

Nichols  law  in  Ohio,  617 

Nitti,  F.  S.,  cited,  595  n.,  749 

Noble,  F.  H.,  cited,  144 

Non-residents,  taxation  of,  119. 
121,  123,  124  .  ' 

North,  F.  A.,  cited,  207 

North  Carolina,  income  tax  in,  101; 
taxation  of  banks  in,  153,  158; 
railroad  taxation  in,  176,  179,  181 

North  Dakota,  railroad  taxation  in. 
186  ' 

Nota  capHiritatis,  3 

Noycs,  G.  H.,  cited,  169  n.,  749 

Oberly,  J.  H.,  cited,  148,  238 

O'Callaghan,  cited,  95  n. 

Occupation  taxes,  222;  condemna- 
tion of,  by  Louisiana  tax  com- 
mission, 617 

Occupation  theory  of  Romans,  69 

Octroi,  the,  40 

Ohio,  taxation  of  insurance  com- 
panies in,  161,  164;  taxation  of 
banks  in,  152;  railroad  taxation 
in,  174,  179;  principle  of  "excess 
condemnation"  in,  447;  reports 
of  special  commissions  on  taxa- 
tion, 605,  617,  637 

Oil  pipe  lines,  taxation  of,  195 

Old-age  pensions,  482,  537 

Oleomargarine,  tax  on,  an  example 
of  protective  duty  with  incidental 
revenue,  403 
O'Meara,  J.  J.,  cited,  55  n. 
Ontario  Commission  on  Railway 
Taxation,  Report  of,  cited  and 
quoted,  231,  232,  255,  256,  257, 
258,  613  >        ^        > 

Optional  Rating  Act  in  New  Zea- 
land, 524-525 
Oregon,     mortgage     taxation     in, 


INDEX 


799 


105  n. ;  projected  introduction  of 
apportionment  by  expenditure 
method  in,  362-363;  reports  on 
taxation,  604,  613 
Organization  tax  on  corporations, 
171-172,  215,  216 

Pabst,  cited,  505  n. 

Page,  T.  W.,  mentioned,  633 

Par-value,  shares  without,  213 

Pantaleoni,  M.,  cited,  715  n. 

Parieu,  work  on  general  property 
tax  by,  34  n. 

Parlor-car  companies,  taxation  of, 
191-192 

Patten,  S.  N.,  727 

Paulding,  cited,  436  n. 

Peck,  G.  R.,  cited,  258 

Peisker,  E.,  cited,  511  n. 

Pennsylvania,  early  corporation  tax- 
ation in,  148;  acts  for  taxing 
banks  in,  151-152,  158;  taxation 
of  savings  banks  in,  159;  taxation 
of  insurance  companies  in,  161, 
163;  taxation  of  railroads  in,  171, 
178,  181,  182;  general  corporation 
tax  developed  by,  195  ff.;  tax  on 
corporate  charters  in,  215-216; 
assessment  of  capital  stock  at  its 
market  value  in,  240;  taxation  of 
property  and  of  stock  of  corpora- 
tions in,  277-278;  exemption  of 
corporations  from  local  taxation 
in,  312;  separation  of  state  and 
local  revenues  in,  369;  tax-con- 
ference report  of  1892,  602-604; 
report  on  taxation  of  1890  and 
1911,601,629 

Pepy's  Diary,  cited,  435 

Percentage  taxes,  45,  47 

Perry,  A.  L.,  cited,  98  n. 

Personal  property,  first  entrance  of, 
into  assessment  lists,  13;  the 
struggle  to  evade  taxes  on,  13-14; 
escape  of,  from  taxation,  22-26, 
32-33;  dishonesty  resulting  from 
tax  on,  26-28;  as  a  part  of  general 
property  tax  should  be  abolished, 
75;  farcical  character  of,  in  United 
States,  327;  effect  of  a  federal 
income  tax  on,  385;  evils  con- 
nected with  arbitrary  assessment 
of,  394-395;  remnants  of  tax  on,  in 
the  state  of  New  York,  65 
Personal  services,  payment  of  com- 
pulsory contributions  in,  3 
Petsche,  M.,  cited,  505  n. 


Petty,  Sir  William,  8;  quoted,  46- 
47,400 

Phelan,  R.  V.,  cited,  144  n. 

Philadelphia,  report  on  taxation, 
597 

Phillippsberg,  cited,  307 

Phillips,  cited,  54 

Physiocrats,  the,  79-80,  573 

Piernas-Hurtado,  Jose  M.,  the 
Treatise  on  the  Public  Economy 
of,  566-567 

Pierson,  N.  G.,  Dutch  economist 
and  financier,  466-473,  564;  dis- 
cussion of  writings  of,  on  taxation, 
565 

Pigou,  730  n.;  cited,  715  n.,  736  n.. 
741  n. 

Pillsbury,  A.  E.,  cited,  207 

Pipe  lines,  taxation  of,  194 

Pittsburgh,  local  taxation  of  real 
estate  in,  182;  reports  of  tax  com- 
mission of,  626 

Plehn,  Carl  C,  cited,  22  n.,  97  n., 
105,  227  n.;  articles  on  corpora- 
tion taxation  by,  143  n.;  men- 
tioned, 371;  on  special  assess- 
ments and  fees,  421  n. ;  on  terms 
"rates"  and  "prices"  for  pay- 
ments for  governmental  services, 
425  n.;  Introduction  to  Public 
Finance  by,  595  n.;  secretary  of 
California  tax  commissions,  614, 
632,  636 

Pohbnan-Hohenaspe,  A.,  cited,  510 

Police  power  of  the  state  vs.  the  tax- 
ing    power,     402-406,     411-412 

Political  allegiance,  as  a  basis  of 
taxation,  111-112,  114;  the  prin- 
ciple followed  in  international 
relations,  118-119;  departure 
from  principle  in  case  of  resident 
aliens,  119-122 

Political  defects  of  the  single  tax, 
77-79 

Political  Science  Quarterly,  articles 
in,  on  taxation  of  corporations, 
144  n. 

Poll  tax,  the  first  stage  of  equality 
in  taxation,  10,  18;  in  colonial 
America,  16;  in  ancient  Rome, 
36,  37;  in  mediaeval  England,  38; 
in  mediaeval  German    towns,  40 

Poor  rates,  British,  53,  55,  438-439 

Portuguese  literature  in  taxation, 
566 

Powell,  H.  M.,  cited,  143  n.,  202 

Powell,  T.  R.,  cited,  264  n.,  268  n. 


800 


IXDEX 


Pow^r  companies,  taxation  of,  193- 

Powers   of  government   to   secure 
revenue,  401  ff.  aecure 

Precarium,  the  term,  5 
Precision  m  assessments,  390  ff 
Premmms  tax  on  foreign  in^rance 
companies,  161  ff     ^    '"^^rance 

Prices,     term    for    payments    for 
certain    governmental    services, 

^Zhhl^^T'^y^  ''^^  °^  ta-^^tion 
with  development  of,  3-4 

i-rivilege  tax,  on  railroads,  176,  177- 
on  telephone  companies,  187;  ap- 
plied to  parlor  and  sl4ping-cir 
companies,  191;  gas  and  electric 

^'^etefSknttlf-^^^^^^^^ 
Probate  duties,  126,  453 

"^T 132'  "^'^"^  ""^  inheritance  tax 
Probyn,  cired,  54 
Procter,  J.  P.,  cited,  207 
mduction  and  exchange,  dangers 

of  ^system  of  taxation  resting^on 

^'^S;?Si'^^*^'^'^^^^"'    ^^1-132;   as 
appiiecl    to     income    tax,     137- 

spread  of  principle,  as  applied  to 
inheritance  tax,  138-140;  prin- 
4JPAS^'  l^  English  estate  du  y, 
455-456;  m  New  Zealand,  462- 
^/  .*",H«»a^d,    470^73;    in 

488,  m  Australasia,  516-522;  in 
Switzerland,  571  ' 

Property,  as  an  index  of  ability,  57- 

Property  taxes,  the  first,  11.    See 
tjeneral  property  tax 
Prostitutes,  Roman  tax  on,  36 
^^^ction  and  taxation,  437-438 

Protection  to  home  industry,  aboli- 
tion of,  were  the  single  tav 
adopted,  77-78  ^ 

Protective  tariff,  the,  383 

if  ?Ai'*?^'^''*>^i^n  *^^  taxation 
m,  101;  tax  reforms  in,  473-480; 

^yl^S^^^  l""""^^  ''^''^""^  «yst^em  in 
477-478;  lump-sum  system  of  in- 
come taxation  in,  485;  later  tax 
reforms  m,  497  ff.    .S^ec  Germany 


Public  price,  definition,  432 
i'uWic    purpose,    doctrine    of.    in 

America,  437  ' 

Public-service  corporations,  taxi- 
*?"«'  148-149,  182-195,  22t 
22b;  definition  of,  in  different 
states,  183,  184  "^nerent 

^'iSinH^f'^''''"'  apportionment-by- 
expenditure    method    urged    by 
359;  mentioned,  611,  624         ^' 

Puritanism,  relation  between  com- 
mercialism and,  9 

Quarta,  Oronzo,  cited,  262 
y^mz-private  price,  426,  427,  431. 
587;  definition,  432  ' 

^'S?l52'*'  recent  tax  reforms  in, 
I       533  ^^^'    *"^o"^e    tax    in,    532) 

'  ^"th^^r^^  ^^^'y-  '^'^  s^nefit 

Qut-%ntfl6^^'  P-  ^^^-^'  ^8  n. 

''T;x'''by,"r4l'^;^     ''Betterment 

Railways,  early  taxation  of,  145  ff  • 

progress  m  movement  toward  sepi 

botr^  ^S"??^^  ^^'  ^y  special 
boardj  148-151;  state  boards  for 
assessing,  149;  ad  valorem  system 
of  assessment,  150;  the  unit  rule 
in  a.«^essing,  150,  151;  history  of 
development  of  taxation  ^o^ 
IJO  ff.;  actual  conditions  as  to 
taxation  of,   177-182;  definition 

tion  nf^  •  "''v ^^  ^/'  246-249;  taxa- 
tion of,  m  >^ew  Jersey,  613;  taxa- 
tion of,  m  Ontario,  613 
oee  Corporations 

Rates,  defined,  438,  442-443 

&ud!^A^"IS'  "^^^^^-«^'  ''' 
Real  estate,  evolution  in  method  of 
assessment  of,  326-327;  local 
taxation  assuming  more  and  more 
the  form  of  a  tax  on,  343-  tax  on 
"^->fWe  for  general' V^enue 
locaMnriS?  ^'""^   ^^^^^^ted   to 

Srirv      ''^'''^''    ^^^'    «^iLs    of 

arbitrary  assessment  of,  39^-394 
oee  Land  tax 
Receipts.    ^S'ee  Earnings 
Sin'?.'  ^'^^^^'^^^  of  preci- 
3^^397  ^^"^^"^   «-^"re^l   by, 


INDEX 


801 


Reciprocal  acts,  providing  for  taxa- 
tion  of  foreign   insurance   com- 
panies, 162 
Reciprocity  theory,  the,  593 

Recoupment,  446-447 

Reeves,  W.  P.,  cited,  516  n. 

Regalia,  the,  399,  407 

Regressive  nature  of  general  prop- 
erty tax,  28-29 

Regressive  taxes,  28,  132 

Regulation,  state's  power  of,  or 
police  power,  401^02;  state's 
power  of,  vs.  the  taxing  power, 
402-406 

Reichkriegssteuer  in  Germany,  514  n. 

Rentals  tax  in  Canada,  395 

Rent-charges  in  mediaeval  times; 
39,  41^2 

Rents  anfl  movables,  grants  of,  in 
mediaeval  England,  41 

Repair  of  bridges  and  fortifications, 
liability  to,  3 

Reports  on  taxation,  596 

Residence,  place  of,  and  taxation, 
110  ff. 

Res  mancipi,  35 

Responsibility  of  citizens,  lessening 
of  sense  of,  under  the  single  tax, 
78-79 

Reversion  duty  on  land  in  Great 
Britain,  492-493 

Rhode  Island,  railroad  taxation  in, 
149,  179;  definition  of  public- 
service  corporations  in,  183;  taxa- 
tion of  street  railways  in,  192; 
general  corporation  tax  in,  209, 
210;  reports  of  tax  commission 
of,  628-629 

Ribot,  749  n. 

Ricardo,  67,  572,  573 

Ricca-Salerno,  G.,  writings  on  taxa- 
tion by,  562 

Ripley,  W.  Z.,  cited,  207 

Ritchie,  Natural  Rights  by,  70  n. 

Rittenhouse,  E,  E.,  cited,  167  n. 

River  improvement  companies,  tax- 
ation of,  194 

Road  companies,  taxation  of,   195 

Robinson,  C.  F.,  cited,  106 

Rodbertus,  cited,  11,  34  n.,  36  n. 

Roedern,  V.,  750  n. 

Rogers,  Thorold,  cited,  54 

Roguin,  cited,  298 

Rome,  taxation  in  ancient,  35-37; 
an  inheritance  tax  in,  126 

Ropes,  J.  C,  cited,  98  n.,  104  n. 

Roscher,  mentioned,  548 


Rosewater,  Victor,  monograph  on 
Special  Assessments  by,  414  n.; 
quoted,  449-450;  cited,  449 

Ross,  Peter  V.,  Inheritance  Taxa- 
tion by,  126  n. 

Russia,  war  finance  in  754,  761; 
war  loans,  775 

Ryde,  W.  C,  cited,  55  n. 

Sacrifice  theory  of  taxation,  338, 
339,  496 

Saladin  tithe,  the,  41 

Salarias,  hability  of,  to  income  taxa- 
tion in  Australasia,  535 

Sanction,  government's  power  of, 
and   fiscal  importance,   401-402 

San  Francisco,  report  on  taxation, 
627 

Saskatchewan,  report  on  taxation, 
637 

Savigny,  cited,  36  n. 

Saving,  criticism  of  property  tax, 
as  a  penalty  on,  59 

Savings  banks,  taxation  of,  159-160 

Savings  banks  deposits,  taxation  of, 
233 

Sawyer,  Ellen  M,,  Bibliography  of 
Works  on  Taxation  by,  63  n. 

Sax,  cited,  413 

Schaffie,  Albert,  on  double  taxation, 
109  n.;  discussion  of  writings  on 
taxation  of,  552,  553 

Schanz,  G.,  cited,  111  n.,  144  n., 
272,  274,  275,  279,  295,  303,  304, 
305,  306;  consideration  of  his 
Taxation  in  Switzerland,  568-572 

Schanzer,  749  n. 

Schdlzung,  the,  6 

Schiffer,  740  n. 

Schmoller,  cited,  44,  51  n. 

Schonberg,  G.  von,  cited,  40 

Schot,  the,  45 

Schrammler,  W.,  articles  by,  508  n. 

Schreiber,  cited,  117,  295,  303 

Schumann,  Fritz,  cited,  501  n. 

Schuyler,  P.,  cited,  674  n. 

Scot,  significance  of  the  word,  6 

Scot  and  lot,  6,  38 

Scott,  W.  R.,  cited,  715  n.;  quoted, 
729 

Scotland,  early  general  property 
tax  in,  44;  history  of  general  prop- 
erty tax  in,  49,  50;  development 
and  history  of  local  property  tax 
in,  55,  56;  land-valuation  bills 
for,  489 

Scutage,  38 


1 

'« 
r 


ill 


I 


802 


INDEX 


Secured-debts   tax  in  New   York 
(»2o  ' 

Scligman,    articles    by,    cited,    12, 
19  P.,  43  n.;  The  Income  Tax  by. 
cited   15,  16,  47  n.;  51  n.,  58,  66 
67  125  n,  322,  383,  475,  482,  486, 
497;  Frogressive  Taxation  in  The- 
ory and  Practice  by,  cited,  34  n., 
73  113,  132,  137,  339,  342  n.,  487 
516   n.,   532,   565;   Shifling  and 
Incidence  of   Taxation  by,   cited 
66,  68,  92,  104,  108,  323;  articles 
by,  in  Political  Science  Quarterly, 
??.    t^'fation     of     corporations, 
144  n.;  article  on  ''Franchise  Tax 
Law  m  New  York"  by,  cital,  226 

t5eparation  of  state  and  local  reve- 
nues, 347  ff.;  meaning  of,  352; 
advantages  of,  352-357;  objec- 
tions to,  357-368;  the  history  of, 
t568-372;  ultimate  outcome  of 
process,  372-376;  reforms  in 
Prussian  system  which  brought 
about,  477-480;  spread  of  idea 
of,  as  shown  by  reports  of  tax 
commissions,  598,;  on  the  con- 
tment,  664;  limitations  on,  667 

oettlement-estate  duty  in  England, 
454 

Sevene,  cited,  126  n. 

Seward,  G.  H.,  611,  623 

Sewers  rate,  English,  439-440 

Shareholders,  taxation  of  corpora- 
tions and  of,  297  ff. 

Shares  without  par  value,  213 

Shearman,    T.    G.,    cited,    20    n.; 
quoted,  89  n. 

Sheftel,  Y.,  cited,  490  n. 

bherman,      Isaac,     land     taxation 
scheme  of,  67 

Shields,  Robert  H.,  cited,  230 

ohipgeld,  38 

Shortt,  Adam,  article  by,  143  n.; 
mentioned,  613 

Sinclair,  cited,  29,  40 

Single  tax,  the,  defined,  66-68; 
general  theory  on  which  demand 
for,  is  based,  68,  69;  identity  of, 
with  labor  theory,  69,  70;  theory 
of  benefit  in  doctrine  of,  71-74; 
principle  of  privilege  in  doctrine, 
74;  conclusion  as  to  inadmissi- 
bility of  demand  for  on  land,  74; 
practical  defects  as  a  method  of 
tax  reform,  75  ff.;  fiscal  defects,. 
75-77;  political  defects,  77-79; 
ethical  defects,  79-83;  economic 


defects,    83   ff.;    inadequacy   of, 
in  new  and  in  poor  communities, 
83-86;    effects    of,    on    farmers 
m     general,     86-91;     economic 
effects   of,    in   urban    communi- 
ties, 92-95;  and  the  exemption  of 
improvements    from    local    real 
estate  tax,  93-95;  effects  of,  in 
cities,  92-95;  lack  of  effect  of,  on 
wages,    95;    a   wholly   mistaken 
scheme  as  a  method  of  tax  re- 
form, 97;  two  prime  mistakes  of 
supporters  of,  340;  reference  to, 
444-445;    claims   of,    concerning 
New   Zealand,    464-466;    move- 
ment away  from,  in  Australasia, 
.534,  535 
Single   Tax   League,    platform   of, 
quoted,  69 

Sleeping-car  companies,  taxation  of, 

191,  192 
Smith,  Adam,  quoted,  47  n.;  objec- 
tion to  inheritance  tax  by,  136; 
on  the  necessity  of  precision  in 
assessment,  390,  393;  classifica- 
tion of  methods  of  securing  reve- 
nue suggested  by,  400;  distinction 
drawn  between  fees  and  taxes  by, 
407;  mentioned,  544, 572, 573, 577 
bmder,  G.  E.,  quoted,  253  n.;  cited, 

258 
Snyder,  W.  P.,  cited,  144  n. 
bocial  considerations  and  the  faculty 

theory,  338-342 
Social  vs.  fiscal  principles  of  finance, 

31G-317 
Social  theory  of  finance,  342 
Social-utility  theory  of  property,  70 
Socialistic    theory    concerning    in- 
heritance, 130-132 
South  Australia,  land  taxes  in,  516, 
519,  520;  exemption  of  improve- 
ments in,  526,  527;  income  tax  in, 
531,  533  n. 
South  CaroUna,  definition  of  public- 
service  corporations  in,  183,  184 
report  on  taxation,  638 
Soward,  A.  W.,  cited,   126  n. 
Spam,  recent  literature  on  taxation 

m,  566,  567 
Special  assessments,  system  of,  96, 
399;  a  specifically  American  de- 
velopment, 413;  definition  of, 
414,  432;  the  theory  of,  415  ff.; 
wherein  difference  lies  between 
taxes  and,  415-418;  distinction 
between  fees   and,   418-421;   in 


M 


INDEX 


803 


Germany,  507;  system  of,  termed 
"betterment  tax"  in  England, 
433 

Special  taxes,  416  n.,  438 

Speculation  and  the  single  tax,  81- 
82 

Speiser,  P.,  cited,  117,  295,  298 

Spirituous  liquors,  tax  on,  in  Ger- 
many, 501,  502 

Sprague,    O.  M.  W.,  cited,  745  n. 

Stamp,  Sir  J.,  cited,  595  n. 

Stamp  tax,  development  of,  in  Hol- 

^  land,  9;  a  single,  proposed,  66 

State  boards  of  equalization,  21, 
22,  355 

State  finance,  relations  of  federal 
finance  and,  344-345,  377-389; 
in  Australasia,  535-538 

State  and  local  revenues,  separation 
of,  347  ff.    See  under  Separation 

State  Tax  commissions,  permanent, 
609-610;  reports  of  (1870-1900), 
598-609;  (1901-1910),  609-621; 
(1911-1921),  628-629 

Steamboat  companies,  tax  on,  195 

Steiger,  J.,  cited,  595  n. 

Steiger,  J,  S.,  cited,  505  n, 

Steiger,  P.,  cited,  117 

Steinitzer,  E.,  cited,  145  n.,  263 

Stents  in  Scotland,  49-50,  55 

Steuer,  the  German  term,  5 

Stevens,  W.  B.,  cited,   153 

Stewart,  W.  D.,  530  b. 

Stock,  taxation  of  corporate,  and  of 
property  represented  by,  276-280 

Stock-exchange   tax,   334,   639-640 

Stockholders  of  corporations,  taxa- 

^  tion  of,  108,  123-124,  285  ff. 

Stoppage-at-source  system  of  in- 
come  taxation,    160,    485-486 

Story,  Conflict  of  Laws,  by,  cited,  114 

Stourm,  R4ne,  cited,  51;  writings  on 
taxation  of,  559,  560 

Street  railways,  methods  of  taxation 
of,  192,  193 

Stringher,  749  n. 

Strutz,  Dr.,  117,  510  n.,  511  n. 

Subsidy,  original  significance  of 
word,  5;  the  first  general,  in  Eng- 
land, to  supplement  the  fifteenth 
and  tenth  (1514),  45 

Subventions  to  local  government, 
665   ^ 

Succession,  view  of  inheritance  tax 
as  a  charge  on  privilege  of,  132- 
133 

Succession  duty  in  England,  453,  455 


Sugar,  taxation  of,  in  Germany,  501, 
502 

Suitability  in  taxation,  principle  of, 
379  ff.;  tax  on  corporations  con- 
sidered with  reference  to,  380- 
382;  the  mheritance  tax,  382;  the 
income  tax,  382-383 

Super-tax  in  England,  486-487 

Supplementary  property  tax  in 
Germany,  497 

Supply  mihoiU  Burden,  Bentham's, 
127 

Supreme  Court,  decisions  on  taxa- 
tion by  states  of  bonds  and  stocks 
held  by  non-residents,  285,  286, 
288,  289^290;  decisions  concern- 
ing taxation  of  corporations  and 
of  shareholders,  299 

Surety  and  fidelity  companies,  taxa- 
tion of,  159 

Surplus  Revenue  Act  in  Australia, 
538 

Switzerland,  differentiation  of  taxa- 
tion in,  101;  federal  laws  in,  regu- 
lating taxation,  116,  117;  present 
forms  of  taxation  in,  140-141; 
distinction  between  taxation  of 
corporations  and  of  individuals 
recognized  by,  253;  system  of 
corporate  taxation  followed  in, 
259-260;  taxation  of  income  and 
of  property  of  corporations  in, 
274;  taxation  of  property  and  of 
stock  of  corporations,  279;  ques- 
tion of  double  taxation  of  cor- 
porations, 295-296;  taxation  of 
corporations  and  of  shareholders, 
302-305;  discussion  of  taxation 
in,  by  Professor  Schanz,  and  value 
of  his  work  to  Americans,  568- 
572 

Tacitus,  Annates  of,  cited,  36  n., 

TaiUe,  the,  43-44,  50-51 

Tallage,  38 

Talomteuer,  in  Germany,  504 

Tanqu^rey,  cited,  261  n.,  306 

Tasmania,  land  value  tax  system 
in,  520;  income  tax  in,  532,  533  n. 

Taussig,  Professor,  member  of  Mas- 
sachusetts tax  commission,   606 

Tax,  original  significance  of  word,  6; 
distinction  between  fee,  and,  407- 
413;  difference  between  special 
assessment  and,  415-418;  defini- 
tion of,  432 

Taxation,    development   of,    1   ff.; 


i 


804 


INDEX 


III 

II! 


voluntary  payments  in  primitive 
societies,   2;  rise  of  compulsory 
contributions,  2-3;  rise  of  need  of, 
With     (levelopment     of     private 
property,  3;  rise  of  indirect,  3-4; 
reasons   for  late   appearance   of 
direct,   4;   historical   process  of, 
Illustrated  by  etymology,   5,   6; 
direct,  the  last  step  in  the  his- 
torical   development    of    public 
revenues,  6;  direct  vs.  indirect,  6- 
10;     forms     of     direct,     10-14; 
<5jange  m  basis  of,  to  the  product 
of  industry,  14;  recent  tendency 
to  substitute  personal  for  the  older 
real  taxes,  15;  income  as  a  basis 
of,     15-lG;    defects    of    general 
property    tax,    19  ff.;  history   of 
general  property  tax  in  antiquity, 
02-37;    early    mediaeval    history 
of  property  tax,  38-45;  discussion 
of    correctness    of    principle    of 
general  property  tax,  5r>-«l;  the 
single  tax,  66  ff.;  impossibility  of, 
for  pohtical  and  social  purposes, 
"J«er  the  single  tax,  78;  double, 
98    ff.;    differentiation    of,    101; 
question    of    place   of    residence 
and,  1 10  ff . ;  location  of  property 
as  a  basis  of,  112-113;  the  prin- 
ciple of  economic  interest,  113  ff.; 
mheritance    126  ff.;  progressive, 
161-162;  of  corporations,  142  ff.; 
of   railroads,    170-182;   of  other 
public-service  corporations,  182- 
194;  the  general  corporation  tax, 
195-215;  of  franchises,  221-238; 
economic    principles    underlying 
taxation  of  corporations,  238-249; 
practical    reforms    necessary    in 
taxation    of    corporations,    250- 
264;    bearing  of   new   economic 
basis  of  society  on,  316-320;  in- 
fluence of  mocfem  economic  phe- 
nomena upon,   320-325;   benefit 
theory   of,    335-338;   faculty   or 
ability  theory  of,  338  ff.;  superior- 
ity of  abihty  or  faculty  theory  of, 
339-340;  separation  of  state  and 
local  revenues,  347-376;  impor- 
tance of   precision   in,   390-398; 
recent   reforms  in,   451   ff,;  im- 
provements effected  in,  by  indus- 
trial democracy,  451-452;  reforms 
in,  in  England,  New  Zealand,  Hol- 
land,  and   Prussia    (1893-1895), 
451-480;   recent  reforms   m,   in 


Great  Britain,  Germany,  and 
Australasia,  482-538;  general  con- 
clusions concerning,  and  lessons 
^^  be  learned  by  United  States, 
K^o  '  recent  hterature  in, 
ikan.^'  American  reports  on, 
596-^40;  reform  of,  641-659; 
tederal,  state  and  local,  660-678; 
»See  also  Banks  Corporations,  Di- 
rect  taxation,  War  taxes,  etc. 

lax  commissions,  reports  of,  for 
different  states,  596  ff.;  perma- 
nent state,  609-610 

Tax-lien  law  in  New  York  City,  623 

lelegraph  companies,  taxation  of. 

^ 184-186  ' 

Telephone  companies,  taxation  of, 
186-188  ' 

Tennessee,  report  on  taxation,  634 
Tereschenko,  750  n. 
^^^iT^ai   companies,   taxation   of, 

Texas,    raih-oad   taxation   in,    177; 
report    of    tax    commission    of, 

Theodosian  Code,  37 

Tobacco,     repeal     of     prohibition 

against     cultivating,     in     Great 

Britain,  485 
Tobacco  duties,  suitability  of,  for 

federal  revenue,  380;  in  Germany. 

501,  503  •^' 

Toll  bridges,  taxation  of,  195 
Tower  Bridge  Act  of  1895,  447,  448 
Tovynsend,  M.  I.,  quoted,  22 
Irabue,  E.  F.,  cited,  115  n. 
Transfers,  view  of  inheritance  tax 

as  an  indirect  tax  on,  133 
Tnbutum  capitis,  Roman  poll  tax, 
36 

TrOmtum  civiuin,  Roman  direct  tax, 
6o 

Tnbutum  soli,  the,  36 
Trinoda  necessitas,  the,  3      ' 
Trivett,  John  B.,  cited,  520  n. 
Truchy,  H.,  cited,  145  n. 
Trust  companies,  taxation  of,   159 
lurner,  S.  H.,  cited  and  quoted.  44. 
49  n.,  50,  55  ' 

Turnpike  companies,  early  taxation 
of,  145  ff. 


Ulpian,  quoted,  35  n. 
Umpfenbach,    Karl,    Handbook    of 

Science  of  Finance  by,  543-545 
Uncleveloped-land    duty   in   Great 

Britam,  490,  491 


IK' 


INDEX 


805 


Unearned  increment,  German  tax 
on,  505-515 

Uniformity,  lack  of,  a  defect  of 
general  property  tax,  20-22 

Union  depot  companies,  taxation  of, 
194,  195 

United  States,  survival  of  general 
property  tax  in,  140,  141;  advan- 
tage of  other  countries  over, 
found  in  freedom  from  constitu- 
tional restrictions,  344-345;  re- 
cent literature  in,  on  taxation, 
580-595;  reports  on  taxation  in 
different  states,  596-640 

Unit  rule  in  assessment  of  railroads, 
150-151 

Universality,  lack  of,  a  defect  of 
general  property  tax,  22-26 

Unproductive  property,  taxation  of, 
59-61 

Uren,  W.  S.,  pamphlet  by,  91  n. 

Utah,  license  tax  on  corporations  in, 
213;  report  on  taxation,  632 

Vagabond  Act  of  1574  in  Scotland,  55 

Valuation  and  Rating  Acts  in 
Queensland,  522-523 

Vancouver,  single-tax  -experiments 
in,  94 

Vauban,  cited,  50 

Veblen,  T.  B.,  547  n. 

Vecligal  cerium,  Roman  ground 
rent,  36 

Veciigalia,  the,  35 

Vermont,  inheritance  tax  in,  122; 
taxation  of  banks  in,  152;  taxa- 
tion of  savings  banks  in,  159; 
taxation  of  insurance  companies 
in,  161,  163;  railroad  taxation  in, 
172-173,  178,  181;  license  tax  on 
corporations  in,  213;  reports  of 
tax  commissions  of,  609,  612,  618 

Vespasian,  36 

Vicesima  hereditalium,  the,  126 

Victoria,  AustraUa,  income  tax  in, 
460  n.,  520,  532;  land  taxes  in, 
516,  520 

Vignes,  citeil,  261 

Viliani,  quoted,  44  n. 

Vineberg,  S.,  cited,  94 

Virginia,  income  tax  in,  101;  taxa- 
tion of  banks  in,  152;  railroad 
taxation  in,  176,  179;  general 
corporation  tax  in,  for  short 
periods,  211;  license  tax  on  cor- 
porations in,  213;  report  on  taxa- 
tion, 630 


Viner,  J.,  cited,  715  n. 

Viti  de  Marco,  A.  di,  worlc  on  taxa- 
tion by,  562;  cited,  715  n. 

Vocke,  Wilhelm,  discussion  of  works 
on  taxation  by,  549-552 

Voigt,  Paul,  cited,  508 

Voltaire  and  the  single  tax,  79-80 

Voluntary  offerings  in  |)riinitive 
societies,  2 

Von  Billow,  cited,  40 

Von  Scheel,  cited,  126  n. 

Vuitry,  cited,  38 

Wade,  F.  C,  cited,  94 

Wages,  lack  of  effect  of  the  single 
tax  on,  95;  tax  on,  in  Holland, 
467;  tax  on,  in  Prussia,  474,  47t), 
477 

Wagner,  Adolf,  51,  305,  342  n.,  402, 
421,  475,  500,  505  n.,  510;  sup- 
ports theory  of  a  tax  on  land 
values  but  not  a  single  tax,  68; 
on  double  taxation  of  corpora- 
tions, 108;  consideration  of 
Science  of  Finance  of,  546-547; 
compared  with  Roscher  and 
Cohn,  549 

Wahl,  A.,  cited,  145  n. 

Walker,  Amasa,  cited,  30,  59 

Walker,  Francis,  Double  Taxation 
in  United  States  bv,  cited,  98  n., 
124  .  ,  > 

Walpole,  29;  quoted,  48 

Walter,  cited,  35,  36 

Walradt,  Professor,  G36 

Wangemann,  cited,  144  n. 

War  costs,  what  are,  717;  objective 

and    subjective,     718-720;     can 

they  be  shared  with  the  future, 

720-732;  ought   they  to  be  all 

shared,  733 
War    expenditures,   average   daih-, 

750-757;     United     States,     756; 

Great  Britain,  753 
War  loans,  688 

War  revenue  acts,  the,  679-714 
War    taxes   as    compared    to    war 

loans,  688,  741 
Washington,  State  of,  franchise  tax 

in,  213 
Watch  and  ward,  liabiUty  to,  3 
Water  companies,  taxation  of,  194 
Webb,  C.  A.,  cited,  55  n. 
Webb,   Sidney,   cited,   458,   495, 
Weber,  A.,  cited,  505  n.,  508 
Weber,  Max,  articles  by,  9  n. 
Weeks,  Jos.  D.,  report  by,  cited,  239 


Ill 


806 


INDEX 


WeisSfenbom,  H.,  cited,  505  n. 

Wells,  David  A.,  402;  discussion  of 
the  Theory  and  Practice  of  Taxa- 
tion of,  591-595;  New  York  re- 
port written  by,  598 

Wesselski,  cited,  505  n. 

West,  Max,  90  n.,  91  n.,  126  n.,  127 
n.,  132  n.,  611;  quoted,  121>-130 

Westenhaver,  D.  C,  cited,  369 

Western  Australia,  land  taxation 
in,  520;  income  tax  in,  532,  533  n., 
534 

West  Virginia,  license  tax  on  cor- 
porations in,  213-214;  progress 
toward  separation  of  state  and 
local  revenues  in,  369;  reports 
on  taxation,  599,  612 

Weyermann,  M.,  cited,  511  n. 

Whitney  and  Cummings,  cited,  207 

Whitten,  R.  H.,  611 

Wilhehn,  Alexis,  cited,  67 

Willan,  W.  E.,  cited,  126  n. 

Williams,  C.  P.,  cited,  155 

WiUiams,  W.  B.,  cited,  148,  238 

Willis  law  m  Ohio,  617 

Willis,  Benjamin  A.,  cited,  104  n. 

Wilms,  Dr.,  510 

Window  tax  in  France,  474  n. 

Wine,  taxes  on,  in  Germany,  501, 503 

Winn,  Henry,  cited,  104  n.,  207 

Winnipeg,  single-tax  experiments 
in,  94;  report  on  taxation,  628 


Wisconsin,  mortgage  taxation  in, 
105;  inheritance  tax,  132;  railroad 
taxation  in,  175;  definition  of 
public-serivce  corporations  in. 
183;  method  of  taxing  franchises 
in,  231;  taxation  of  income  and 
of  property  of  corporations  in, 
273;  report  on  taxation,  608 

Withers,  H.,  cited,  732  n. 

Wolcott,  Sec,  674 

Wood,  F.  A.,  cited,  144,  207 

Worms,  Emile,  The  Science  oj  Fi- 
nance by,  559 

Worms,  cited,  98  n. 

Worsement,  discussion  of,  in  con- 
nection with  betterment,  446 

Worthington,  T.  K.,  cited,  144  n. 

Wreck,  rights  of,  2 

Wright,  John  A.,  papers  by,  on 
taxation  in  Pennsylvania,  602 

Wyliej  J.,  work  on  new  British 
duties  by,  485  n.,  490  n. 

Young,  A.  L.,  cited,  97  n. 

Zartman,  Lester  F.,  cited,  168 
Zeumer,  work  by,  on  local  taxation 

in  Germany,  39  n. 
Zorli,  Alberto,  discussion  of  works 

on  taxation  by,  563 
Ziircher,  E.,  cited,  117,  295,  303, 

304 


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